Taking a data-driven approach to determine optimal pricing is essential in today’s environment. Manufacturers must identify which products are most important to shoppers and analyze various pricing scenarios to find a balance between satisfying customers, driving increased sales, and optimizing profit margins.
This begins with an understanding of price elasticities, especially for the most important food items. In addition, it may be important to adjust some prices locally according to the markets you are in. It is also worth noting that price increases can be staggered to soften the impact and gauge consumer response. Raising prices sharply may drive greater sales losses than raising them in smaller increments, a few products at a time, rather than across the entire assortment.
Are price changes the best path?
It is also vital to understand your category roles and intents. CPG manufacturers should ask questions such as:
- Are price increases really the way that we need to grow?
- Should I maintain price to continue to attracting customers?
- Where else can I continue to have margin at the same time?
Manufacturers must also pinpoint why customers value their products. What need does a certain product fill? What underlying motivation brings customers back to store shelves for repeat purchases?
Where possible, it is best to pair a price increase with an additional quality or a feature customers value. Interestingly, inflation has not dampened consumers’ hunger for novelty: 86% of shoppers are interested in trying new products, and 65% are willing to pay a premium for an innovative new product. Alternatively, manufacturers may simply emphasize the most highly valued existing characteristics in communications. The key is identifying—with precision—what qualities or attributes are most important to customers.
Manufacturers who take a more intelligent approach to pricing and assortment will have greater success at sustaining sales and unit volume while sustaining shopper loyalty despite some unavoidable costs.
Retailers need the ability to rationalize their product assortments and optimize for depth and breadth. Strong analytics make a clear case for carrying and promoting your products. Depending on factors such as household income and lifestyle (for example, adhering to a keto or plant-based diet), certain products may be in higher demand in different geographies—or even in different store locations within the same city.
Of course, consumer needs and preferences are continuously evolving. To accelerate profitable growth in a changing environment, manufacturers must continuously adapt their assortment accordingly. Collaborating effectively with retailers requires the flexibility to view, manage, and adjust assortments throughout the planning process.
Having the right analytics capabilities positions manufacturers to pivot nimbly and quickly adapt to market dynamics.
To ensure that shoppers don’t feel overwhelmed with continued price increases, manufacturers should consider offering promotions on premium or staple products to bring prices back down. There are always opportunities to make up for thinner margins on other items that may be less sensitive. Naturally, making the best pricing decisions requires modern analytics tools to identify in real time which products are most inelastic.
A significant amount of money is wasted on ineffective promotions each year. For example, 37% of sales in the Asia-Pacific region were a result of price promotion in FY21. However, 52% of these sales would have happened anyway, even without the use of a discount. Manufacturers could reclaim or reinvest a significant portion of their promotional budget by making data-driven decisions, focusing on the promotions that are truly driving incremental sales. For instance, less than a year into incorporating price and promotion analytics into its strategies, a major pet food player in the Asia-Pacific market saw incremental sales grow 12% on average.
Analytics also inform seasonal assortment decisions. With a bird’s eye view of overall category performance and pricing, manufacturers can optimize their offerings for more cyclical shopping periods. For example, a chocolate manufacturer may offer a greater depth of products close to Halloween, Valentine’s day, and other candy-heavy holidays.
Retail and supplier collaboration
Measuring and managing on-shelf availability is a prime opportunity for manufacturers and retailers to collaborate. Having full on-shelf availability transparency is critical as a key path to success. The U.S. food retail industry had a measured 7.4% of items out-of-shelf in the 52 weeks ending February 12, 2022, which cost the industry at least $88 billion in lost sales over the year. An improvement of two percentage points in the on-shelf availability (OSA) rate translates to a one percent increment in sales.
Empty shelves were a major cause of lost sales as we entered the 2021 holiday season. The total on-shelf availability (OSA) rate for the month of November 2021 (93.2%) was lower than the full year 2021 rate (94.3%). This amounts to one item in fifteen (6.7%) unavailable for purchase, to the detriment of manufacturers’ and retailers’ revenue, due to a lack of collaboration.
Now is not the time to keep secrets between partners. Suppliers and retailers that work with NielsenIQ have seen 2%–3% growth in overall sales when they have achieved full transparency in data sharing. In a time of unprecedented inflation, supply chain challenges, and rising competition, CPG firms cannot afford to operate in data silos.