Finding the right price for your product and its target market can be challenging, especially with the influence of economic conditions, trends and competitors.
It is often assumed that when launching a new product that you have to match on price with your nearest competitors, but that needn’t be the case. You could be a premium product within the market and your target is consumers who are looking for quality innovative products in that category. A lower price point doesn’t always have the increased effect on sales you are looking for, consumers might assume your product is of a lower quality due to the low price, and even if it does increase your sales it needs to then counteract the revenue loss due to the lower price point. Your pricing power is always adapting, no matter how large or small your FMCG business is.
Most large FMCG firms have spent the past few years reducing their prices to deal with weak consumer demand. Now these brands, such as Nestlé, Mondelēz, P&G and Unilever, are shifting strategy and increasing their prices, but will this win or lose them revenue? They are testing their pricing power and hoping that improved economic conditions and a focus on innovation will convince shoppers that their products are worth the increased price. They believe that a price increase is necessary because of external factors, including rising commodity costs, and now is the right time to do it with the growing emphasis on innovation and marketing.
Technology can help reduce the guesswork. For over a year now we’ve worked with Vypr Technologies, a game-ified consumer testing app that allows price elasticity and brand messaging to be tested objectively before hitting the shelves. These three charts below represent data taken from Vypr steers for recommended retail price tests, to determine the revenue maximising price for particular products.
Figure One: The product represented in this chart has the correct revenue maximising price, if they were to go lower they may have increased sales but a steep drop in revenue and if they went higher there is a steep drop in potential sales.
Figure Two: This product needs to lower its price point from £5.50 to £4.50 for the ideal revenue maximising price.
Figure Three: This chart shows that an increased price could be used to maximise revenue for this product, the increase in revenue at this higher price is above that of the increased sales at the lower price points.
So how have these FMCG giants fared in their latest pricing power test? Charging more for products helped both Unilever and Nestlé boost underlying sales by 3.8% and 2.8% and P&G experienced its strongest quarter in five years with organic sales up 4%. Meanwhile, Mondelēz’s net revenues declined by 3.7%. So this particular pricing test appears to have been successful for most, although not everyone.
The most important thing to remember when looking at your pricing power is your customers and to be aware of what affects their buying habits. These large FMCG firms saw that their target customers were looking for innovative products and are willing to pay more for them, tracked that the economic influences that affected their consumers were improving and that trends in the media and marketing were favouring their products. Ultimately they saw a short-term strategy to increase their revenue by moving the cost onto their customers. However, Unilever admitted it is a temporary strategy and see pricing being a key feature for the entire sector through the balance of the year and into 2019.
Read more about the FMCG giants testing pricing power at The Marketing Week.