During my CPG career, having launched over 200 New Products in Canada and around the World, there was always a complex challenge to establish and execute an optimal the “Retail Price”. The retail price is a very important new product bundle element to determine, and truly a vital “P” of a New Product’s 4P’s.
Why Is Pricing So Important?
Retail Pricing has a direct impact on 3 Key Stakeholders that greatly influence the commercial success of a New Product – the Consumer, the Retailer, and the Product itself.
All New Products have to achieve sufficient product trial via the point of purchase. New Products offer a cluster of benefits and attributes that are of interest to the brand’s consumer target. Combined, these generate the initial consumer interest or not, called purchase intent. At the point of purchase, consumers judge the value of the new product by comparing the benefits and attributes being offered, to the product price. Consumers make a value judgment from this comparison, and decide at shelf or on-line, whether to make the purchase or not. If the price is too high or too low, vs. the product offering, perceived value is not present, and a purchase decision is either delayed or rejected. Consumers make this buying decision vs. other product offerings available to purchase, and other factors. At the point of purchase, having the right price drives perceived value leading to faster and higher consumer trial. The wrong price will cause purchase rejection and ultimate failure.
Getting pricing right the first time, involves a thorough review of the Market, Competitors, and the New Product itself; a strong dose of common sense is also very helpful. There is a known CPG process to successfully do this.
The 2nd Stakeholder is the Retailer. They hold the power to list and put your product on their shelves. Retailers manage their product shelves very intensely. For Retailers, this is their core asset as it drives their entire operational P&L performance. Retailers measure and track product results, particularly New Products. They review and evaluate a New Product’s Sales Revenue, Unit Velocity, Profitability, and how this item delivers to the overall Sales and Profitability of their whole Product Category.
A New Product’s Retail Pricing Strategy has to take these performance expectations into consideration, as the Retailer decides to accept a new product, place it on shelf, and keeps it there. This Stakeholder has a tremendous influence on the consumer trial as being available for purchase by consumers at shelf or on-line is decided by the Retailer. Getting pricing right the first time with Retailers, involves a review and deep understanding of the Retailer’s planogram, their business performance expectations/metrics, and their Category Strategy.
The 3rd Stakeholder is the brand itself and the Company behind the brand. The product’s pricing must be financially viable. Pricing has to cover all product costs and generate sufficient net margin dollars to fund sufficient Marketing and Sales support, and deliver operational profitability to satisfy Investors, Shareholders, and longer-term needs. The product’s price point is the biggest profit driver line item driver to the P&L; more than product cost, more than commercial support, more than variable expenses, more than fixed overheads, more than anything!
This internal pricing assessment, along with the external understanding of the Consumer and Retailer needs, is key to getting pricing right the first time. Having strong alignment among these Stakeholders will greatly improve the chances of market success.
Why Is Pricing Most Challenging to Manage?
There are many obstacles and challenges to properly determine and manage a product’s price point, throughout its lifecycle. The “Big 3” are as follows:
Information Overload and Analysis-Paralysis
In today’s world of technology, the amount and speed of available information is greater and more complex than ever. But like “Weather Forecasts”, more information does not necessarily lead to greater predictive accuracy and more reliability.
Some type of Consumer Research on pricing is always recommended. Asking the consumer about pricing is common sense. There are relatively modest consumer research techniques that should be done prior to deciding on a pricing strategy; remember to keep it simple.
In addition to consumer research, it is always a good idea to meet with 1-2 Retail Buyers and present a proposed pricing strategy prior to a formal launch. Their feedback is invaluable as Buyers have great consumer knowledge and they know what makes sense for them as Retailers. You will also receive their valuable feedback on non-pricing elements (e.g. Packaging, The Product Concept, etc.). My experience is that Buyers like to help out, as they are rarely asked for feedback at the pre-launch stage. They very much enjoy the participative involvement; and their advice is FREE!
Too Many Cooks in The Kitchen
During the whole process of analyzing and deciding on pricing of a new product, there may be many people involved. They wish to provide input with varying degrees of knowledge and emotion. Internally there are the Scientists, Product Designers, Operations, Sales and Marketing, the CFO/CEO/GM and even possibly the Board of Directors & Investors. Further, there may be external influencers such a Distributors, Brokers and Consultants. The active involvement of these individuals reinforces how important pricing really is, as all of them recognize its importance.
Loss of Control
Once a New Product is brought to market, becomes listed, and attains a merchandise position on shelf, a great deal of control over shelf pricing is lost. The Vendor Company no longer has the control it wishes to have. Retailers can price the product as they wish; both regular retail prices and promotional discounted prices. One Retailer can take a pricing action that another Retailer responds too, totally outside of the purview of the Vendor Supplier. External forces like Competition and others, can also impact shelf pricing. There are Best Practices that can help mitigate this; this should be done prior to launch by the Vendor Company.
being aware and understanding these challenges will help you better determine and manage Pricing. More important, knowing how and why these 3 Stakeholders will influence commercial performance will lead you to a more successful Pricing Strategy. Setting pricing right the first time, is so very important. Remember, you don’t get a 2nd chance to make a good first impression!