Pricing lessons learnt from 2020

Pricing lessons learnt from 2020

LESSONS LEARNT FROM 2020
AND WHAT IT MEANS FOR THE YEARS AHEAD FOR THE CPG AND RETAIL SECTORS

By Ji-Hoon Dierckx, CEO – PRICINGONE

5 POINTS
TO DELIVER

5 POINTS
OF GROWTH OR MORE

  • Keep your Consumers at the Center of your decision making .
  • Start with Consumer Value Creation, above and beyond Pricing.
  • Across all Consumer Value Extraction levers, the least disruptive way to generate revenue is to improve your Mix.
  • Do not underestimate the importance of killer price points for the consumers (shelf and promotion).
  • Trial and Consumption is a delicate balance, a science, in which applying kitchen-logic can be damaging.

To say that 2020 has been a challenging year would be a major understatement

To say that 2020 has been a challenging year would be a major understatement. As we have all experienced, the past year has been marked by historical events and unforeseen changes to both work and home lives. It has also been a year of learning for all and has led to an important moment of reflection, as we study the lessons learnt from 2020, and what they mean for doing business moving forward.

It is a time of unprecedented change, but also of boundless opportunity where each could show their true colors depending on how retailers and CPG manufacturers choose to deliver value… to their customers (CPG Consumers).

Throughout 2020, we captured 5 learnings and thus how-to-win actions that have step-changed, re-grown or accelerated our clients’ revenue growth.

1. Keep Consumers at the centre of your decision making

We understand the difficulties our clients saw during these uncertain times. Faced with margin, trade and pricing pressures, many found it easier to consider only the short term needs of their business.

At Pricing One, we have found that setting out clear objectives for your brand was key. Understanding why it exists and most importantly how you wished to be perceived by your consumers is essential to the
long-term sustainability of your business. We found that such considerations, were especially needed during the period of economic unease that we were faced with in 2020.

Throughout the year, we found that failing to accurately quantify where your brand stands in the eyes of potential consumers could be fatal.
Understanding how your brand and products are perceived, as well as how much value you offer and what your target market craves for was a must especially in volatile and dynamic environments.

The starting point was, assessing exactly where our client’s product stood in the eyes of their consumers (the person who actually pays for the product). Most importantly, we focused on evaluating whether or not they were willing to pay for the product in question.

Keeping the consumer at the heart of business decisions, improved the perceived value of what was on offer to them. It increased the appeal and relevance of the products regardless of external pressures.

2. Above pricing, create value to your consumer

The pressure to increase revenue can lead to rethinking COGS, margins and pricing. Retailers may have also felt pressure to focus on promotional spending, thinking only of trade margins.

However, throughout 2020, we found that immediately or solely focusing on price/ mix or trade spend is not the right path for sustained growth. Despite the possible short-term benefits.

We found that this ‘cost-plus-margin’ approach is certainly not beneficial in a world that is oversaturated with options. This is because the availability and growing popularity of e-commerce, meant that the consumer could compare and scrutinize your product’s value easier than ever.

We saw that many clients, faced with the COVID-19 crisis, were learning that analyzing past history to predict future trends was no longer accurate. On the contrary, this had the potential to lead to damaging and misleading results that we needed to prevent.

We saw the necessity to methodically improve the value of our clients products and brands to their consumers. This would be achieved through methods such as innovations, renovations, communications and distinctive messages, that would make the product stand out amongst others.

Several clients were surprised at first that we focused at the start on how their consumers were thinking, what they were sensitive to, and how to improve line-up, pack sizes, product features and communicated claims.

They swiftly realized that such accurate quantification of incremental value for their consumers, was the sole sustainable approach to then extract this Consumer Value Creation systematically through the levers of pricing and revenue growth ( pack price architecture, pricing, promotions, Mix and go-to-market).

3. Improve your mix

Our approach of starting by creating  value for consumers set the business on the path for growth. not just because of the changes to consumer habits that resulted from the affects of COVID- 19, but also because of the unfortunate assumption that drastic moves on pricing and promotion alone would help revenue.

Following this with relentless activation of the 5 levers of consumer value extraction then enables significant and sustained revenue growth. These levers include: having the right Pack Price Architecture, the right price, promotion and mix and the right go-to-market.

Our experience throughout 2020 saw and confirmed time and time again that the easiest and most sustainable of all value extraction levers was consistently optimizing the mix. This process includes the product line up, channel and store mix.

Whilst we found that drastic moves on pricing or promotions, had the opposite effects on revenue across our client base. Making changes and improving the mix, target market and optimization of Pack Price Architecture, have proven to be far more efficient and sustainable from a consumer recruitment and consumption point of view.

4. Keep in mind the importance of price points

Despite the need to consider factors such as the mix, Pack Price Architecture and adding value to the target market in question,the financial restrictions many consumers faced in 2020, proved that not having the right shelf or promotion price alongside all other factors, also had a negative impact. This is because a price-point driven mindsets became key to managing budgets amidst financial uncertainty.

With a price-point driven mindset having become key to managing budgets amidst financial uncertainty, throughout the past year, we were witness to an increasingly dynamic market. Consumer value perception became more and more heightened.

Our clients needed to offer their products at the right price points, to meet the evolving needs of the market. At the same time, they needed to keep in mind consumer pricing and promotion thresholds, as well as reference sets.

Once this was achieved, our strategies at Pricing One allowed for manufacturers and retailers to maximize their revenues and profit, whilst addressing new found shopper needs. Of course, this was achieved without compromising on delivering superior value for consumers.

5. Maintain a delicate balance between trial and consumption

As a result of COVID-19, the global community was forced to spend more time at home. Consumers began to organize their life to better suit their new day-to-day requirements. Home life became the new ‘norm’ in society, as old routines and habits slowly drifted away. In some cases this led to unprecedented market growth driven by increased home consumption and a shift to online purchases and larger sizes, while in other sectors, this led to severe market contraction, as these sectors were deprioritized by consumers.

We saw a significant difference between companies that spent 2020 dealing with short-term disruptions to their supply chain or trade landscape, as opposed to those who took a broader view of the situation and began to lay the foundations of where future value creation lay.

Our predications for 2021 are that the latter group will deliver best results. Those who saw opportunities in the unprecedented change in consumer behavior throughout 2020 were able to benefit and move their strategies forward into the new year. This is especially important as 2021 will be a year of reset after the trend breaks caused by 2020.

Our clients who consistently delivered the best growth in revenue were those who kept a strategic focus on both trial and consumption and who viewed them as two separate entities. These clients understood the individual role each strategy played in shaping top and bottom line results. 

In one example, by highlighting the difference between trial and consumption, we were able to save our client from a -40% loss of profit on certain product lines. 

2021: Moving Forward

Times of change bring with them new opportunities to challenge what we as a society are used to. COVID-19 has made the trade environment more competitive than ever before. This is due to consumer habits having evolved as a result of changes in our day to day lives.

At the very least, the fact that we are spending more time at home, has meant that the demand for goods for home improvements has seen a drastic increase.

Social distancing guidelines have resulted in an explosion in online shopping. Leading to significant competition online, as consumers are more able to compare between products and prices. This in turn is putting pressure on retailers who are needing to put an efficiency strategy in place and a focus on assortment optimization.

Moving forward in 2021, the key to winning in this environment is to anticipate and pre-empt both the consumer and trade dynamics and needs and pro-actively address them as follows:

  • 1- Understand and anticipate what  consumers want and will need. Ultimately,   they make the purchasing decision and should be placed at center stage.
  • 2- Put yourself in the shoes of the retailer by looking at their side of the equation. Predicting where they will face issues, to proactively propose solutions before they ask, will give manufacturers a competitive advantage in negotiations.

In one instance, as part of an efficiency strategy to a client, we proposed creating a new pack structure which cost £1 as opposed to £1.50p. This lead to a double-digit profit growth for both our client and retailer. This was achieved without compromising on consumer value and whilst driving segment growth.

Whilst, we are aware this is not rocket science, it is still a science and requires granular understanding of business challenges, consumer dynamics and the trade environment. It also requires a balance of working on all levers of revenue growth to deliver balanced long-term growth, regardless of the urgency of short-term revenue needs and the pressures of the external environment.

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