The Price is Right?
CPG Price Strategies to Drive Volume and Profits.
Consumer Packaged Goods (CPG) manufacturers can employ various pricing strategies to drive retail sales and profits. Here are the top 10 pricing tools you should master regardless of how well developed the brand is you are managing:
1. Value-Based Pricing
Customer Perception: Set prices based on the perceived value to the customer rather than solely on cost. The trick here is to sell a low cost product that is perceived as high value - then charge accordingly to maximize profits.
Premium Pricing: For high-value or luxury items, set higher prices to reflect quality and exclusivity. You would be surprised how much consumers are willing to pay. For E-commerce sales you should have no problems setting a high price. For selling to retailers, you will find challenges as most category managers falsely assume they have to charge low prices for products…often they leave a lot of money on the table due to this false perception.
2. Competitive Pricing
Market Benchmarking: Regularly analyze competitor pricing and adjust prices to remain competitive. However, don't follow your competition blindly as they may be wrong.
Price Matching: Offer price matching guarantees to prevent losing sales to competitors; but only do so if you absolutely feel you have to price match.
3. Cost-Plus Pricing
Markup on Cost: Calculate the total cost of production and add a fixed percentage markup to ensure a profit margin. For most CPG manufacturers however you will work off margins vs mark-up. You should know the difference. If not, please read this article.
Adjust for Overheads: Ensure all overheads are covered and factor in expected profit margins. It is always smart to build in a buffer to cover the unexpected like inflation.
4. Promotional Pricing
Discounts and Sales: Offer temporary price reductions to boost short-term sales and attract new customers. However, only give away just as much as you need in order to drive incremental sales. At some point you will hit the point of diminishing returns…the price below which consumers simply will not purchase more. Instead, you are just giving existing customers a lower price even thought they probably would have purchased regardless of the promotion.
Bundling: Sell products in bundles at a lower price than if purchased individually to increase the average transaction value.
5. Penetration Pricing vs Price Skimming
Introductory Low Pricing: Set a low initial price to enter a competitive market and attract customers quickly.
Gradual Increase: Gradually raise prices as the product gains market share and customer loyalty.
Price Skimming: If you are a new to the world product with no competition, price high as you are the only game in town and can enjoy fat margins. As competition comes online you can then lower your price when they launch to block/frustrate their launch.
6. Psychological Pricing
Price Points: Set prices just below a round number (e.g., $9.99 instead of $10) to make the price appear lower.
Perceived Value: Use pricing that reflects the perceived value, such as higher prices for premium products.
7. Dynamic Pricing
Real-Time Adjustments: Adjust prices in real-time based on demand, competition, and other market factors. The gasoline guys do a great job of this…think long weekends and high gas prices.
Seasonal Pricing: Vary prices according to seasonality, demand fluctuations, and inventory levels. Think cheap hotel prices during the summer in Palm Springs or Phoenix Arizona where the heat is brutal.
8. Tiered Pricing
Multiple Price Points: Offer different versions of a product at varying price points to cater to different customer segments.
Good-Better-Best: Implement a "good-better-best" pricing strategy to appeal to a wide range of customers.
9. Subscription Pricing
Recurring Revenue: Offer subscription models for regular delivery of products, ensuring consistent revenue and customer retention.
Discount for Commitment: Provide discounts or added value for customers who commit to long-term subscriptions.
10. Geographical Pricing
Regional Adjustments: Adjust prices based on regional economic conditions, demand, and competition.
Localized Promotions: Tailor promotions and pricing strategies to specific geographic markets to maximize relevance and impact.
Implementation Tips:
Data Analytics: Utilize data analytics to continuously monitor and adjust pricing strategies based on market conditions and consumer behavior.
Customer Feedback: Regularly gather and analyze customer feedback to understand pricing perceptions and adjust strategies accordingly.
A/B Testing: Conduct A/B testing with different pricing strategies to determine what works best for your products and target market.
Monitor Competitors: Keep a close eye on competitors’ pricing strategies and be ready to adjust to maintain competitiveness.
Flexibility: Be flexible and willing to adapt pricing strategies as market conditions change.
By strategically implementing these pricing strategies, CPG manufacturers can optimize their pricing models to drive both retail sales and profitability.
However, for the lucky few of you that have read this far, here is a painful reality that you need to consider. Retailers (particularly traditional retailers vs Amazon) have set price points within their categories. For example, the salty snack category many sell potato chips at only three different prices regardless of the brand or package size/product type. For example, they may have once price point for value brands & private label, a second for mid-market brands and a third for premium and new brands. It is critical you are aware of these price points before presenting new items to a retail category manager. Generally speaking, they do not want to create too many different price points in their category. You may have to pick one price point for your product or product line and make sure you can sell profitably at that price point everyday and when on deal.
