Pricing Mechanisms for Managing Through Inflation
In inflationary times, consumers are adjusting their price beliefs. Here is Tellusant’s holistic perspective on FMCG pricing mechanisms.
For FMCG companies, the traditional value equation should be the centerpiece when thinking about pricing:
VALUE = BENEFITS to consumers − PRICE to consumers
The graph below summarizes different ways to rejig this value equation.
I. Changing or introducing new pack sizes is a common way to affect value. There are two ways to achieve this:
a. Introducing small packs that have a low transaction price point even though the per unit price may be high. The Coca-Cola Company’s introductions of Minis is an example.
b. Introducing large (bulk) packs that offer a lower per unit price. An example is Bavaria’s beer jumbo pack in Colombia: para compartir.
II. Changing the pack type can allow for a lower price at the same value. Reusable or returnable packs are good examples, such as returnable beer bottles.
III. Change of origin is sometimes possible. Instead of importing the product, perhaps it can be made locally and sold at a lower price?
Much can be learned from, e.g., Fujifilm and Zeiss who sell the same product in a “Made in Japan/Germany” version and in a “Made in China version.” The latter is cheaper.
IV. Reformulating ingredients may allow for lower prices. Kraft lowered the cheese content in Slices many years ago, until consumers saw through the ploy. Still it is a valid approach.
Also, reformulation may have tax benefits. Take, e.g., the reformulation of colas in South Africa to avoid the sugar tax.
V. Adjusting the price ladder is almost done in inflationary times. Consumers typically continue consuming, but trade down from premium to mainstream brands, and from mainstream to value brands.
VI. Promotions play an important role in some countries. During inflationary times consumers evaluate them with extra scrutiny.
The largest opportunity for promotions are not in countries where they are well established (like the US). Instead. the focus of global FMCG companies should be on how to expand this pricing mechanism in emerging countries.
VII. Finally, what most people think of of as pricing: regular price cuts. This is the least productive way to optimize the value equation because price elasticity is almost always lower than required to make the price cut profit neutral.
Still, there are situations when a price cut is the best way to go. This is especially the case in countries where the local price is far above peer country prices. Then a price reset may be warranted.