SUMMARY: When retailers compete on price and rollbacks are market-wide, retail traffic trends rarely change. More importantly, Nielsen research shows that price rollbacks can actually reduce category dollars, making an effective pricing strategy a necessity.
Rob Schram, Vice President Analytic Consulting, The Nielsen Company
When commodity costs for foods rose dramatically in 2008, most manufacturers were forced to raise prices to protect margins—some more than once. Once commodity prices dropped, retailers put pressure on manufacturers to lower prices. But as the Great Recession took hold and consumers cut back on spending, manufacturers wanted higher prices to stick to compensate for the flat unit growth experienced in most categories.
And so the price wars began. And true to life, in war there are no winners. When retailers compete on price and rollbacks are market-wide, there are no inherent traffic gains. In fact, Nielsen research shows that price rollbacks can actually reduce category dollars.
Retailers intending to fight on price better know which categories to target or they will be fighting a losing battle. Price elasticity is a measure of consumers’ likelihood to purchase in relation to a change in price. If you raise prices on categories with a price elasticity of less than one, or take a price rollback, you can actually decrease category sales. It’s a delicate balancing act. A price rollback may slightly increase category volume, but not as much as price goes down—so dollar sales actually go down. And vice versa on price increases—sales go up, but not as much as volume goes down.
Pinpointing best-bet categories requires knowing how elastic they are to price changes. High-elasticity categories are more sensitive to price changes because they are considered less of a necessity. When the opportunity cost of buying these products become too high, consumers opt out. These categories are typically commoditized products with low differentiation. Examples include:
- Paper towels
- Canned vegetables
- Canned pet food
- Canned fruit
- Incontinence care
Conversely, low-elasticity categories are more insensitive to price changes because they are typically the “must have” items that consumers will continue to buy no matter the price. These categories are typically perishable, convenient and are less commoditized. Examples include:
- Sliced cheese
- Dry pet food
- Macaroni & cheese
- Frozen side dishes
- Deli meat
- Bath tissue
- Microwaveable meals
Six Keys to Successful Price Planning
- Plan pricing from two starting points – supply side / demand side. Define profit goals by forecasting the cost of goods, labor and transportation costs and plant capacity. And understand consumers’ price sensitivity to both your price and your competitor’s.
- Establish a cyclical price management process. From planning and implementing to tracking, maintaining on-going control of the process will ensure that profit requirements are met and promotion response is achieved.
- Take a portfolio approach. Understanding the price elasticity of each item in the portfolio in relation to the profit impact of a price increase provides a path to meeting corporate profit goals in a unified approach.
- Focus on hard metrics at the center. Hard metrics with common definitions like shelf prices, list prices shipments and financials across brand groups must be the focus of any price planning approach.
- Establish KPI’s and milestones. Determine scorecards for all key brands and track results and the execution. Be prepared to adjust the plan to react to marketplace changes and competitive initiatives.
- Endorse and enforce. A portfolio approach means that some brands will take price changes and other will not. All parties in the process must follow the process and understand the broader goals.
Price wars are a long-term proposition, where over-reacting often leads to failure. Long-term winners innovate and differentiate and know that while price is important, value is more important. Careful planning, research and ongoing management are the steps it takes to win the war on price.