Why pricing strategy matters, and how to go about creating one.
If you ask a sales rep or retail customer how to increase sales, we bet their first response would be price or promotion. Rightly so, in the fast-moving consumers goods industry, getting your price right is (almost) everything! Typically, in commoditized categories where cash outlay is low, consumers look at their wallets first.
However, many manufacturers still don’t know what their consumer’s price is, nor what it should be. A long chain where product changes hands several times before it reaches the consumer shouldn’t serve as an excuse. In fact, there are more chances of price fluctuations so it’s critical to think about your desired RRP. And before anyone flags consumer protection (or anti-trust) laws as a barrier – which do forbid manufacturers to enforce their prices down the chain - please remember that the first R in ‘RRP’ stands for ‘recommended.’
So, what is a pricing strategy? In simplest terms, it’s how your consumer price relates to competition, typically in a % or index format. I’ll be more expensive by 10% or I’ll undercut competitor A by being priced at an ix 90.
Tips to set a pricing strategy:
1) START WITH THE CONSUMER PRICES IN MARKET
Always start from the consumer side so you’re confident there’s demand and you’re maximizing your margins. Survey the market so you have a broad list of competitors and consumer price points. Ensure your sample is not skewed towards a particular channel. E.g.: it’s way easier to sample prices in a supermarket, though in many developing countries these are significantly higher than the market average.
2) DEFINE YOUR KEY COMPETITOR
A practical pricing strategy needs to focus on one competitor, max two, so that you can easily monitor it on an on-going basis. You want to pursue a player that is both sizeable, so there is enough volume to source from, and one that you have the ‘right to win’ against. One way to think about ‘right to win’ is by looking at the consumer value equation (promise/price).
3) SELECT YOUR STRATEGY - UNDERCUT, MATCH, PREMIUM
This is your first take at defining the strategy. Based on how you want to position your product, you decide the delta vs. your key competitor, being to match, undercut or have a premium. Make sure the intervals are meaningful to consumers. A typical tiering strategy in FMCG has 10-15% corridors.
4) BE CLEAR IF CONSUMERS ARE BUYING SIZES OR PRICE POINTS
So far, we haven’t introduced the sizing variable, so when we refer to pricing strategy, we mean it on a per ml or gm basis. However, in many cases there are different product sizes in the market that make this pricing comparison harder for consumers. It’s important to understand first if they are buying a size or a price point. You can find out by the way they refer to it. “I buy a 10-shilling sachet or a half a kilo bag” - would be what you would typically hear from a Kenyan shopper. Obviously, you want to prioritize their reference point. For instance, if your strategy is to undercut competition on pricing, it wouldn’t be advisable to offer a 10-shilling sachet with more grammage, because for consumers they’ll just see you as matching the price.
5) ESTABLISH MARGINS FOR YOUR PARTNERS THAT ARE COMPETITIVE
In order for you to do this step you need to know what are the typical margins (or mark-ups) in your category, for retailer, wholesaler and also distributor. They tend to be constant across skus, but there might be some exceptions (e.g.: smaller skus). The only other input you’ll need is the VAT and you're set to establish a going price/case that is competitive.
6) ENSURE THAT YOUR GROSS MARGIN IS HEALTHY
Any strategy design involves some degree of iteration. It is possible that when you factor in the new price/case not all skus gross margin are where you want them to be. Especially if you’ve been too generous with an intersize discount on bigger skus. You might need to revise your RRP, packaging, case count or even formula to hit the sweet spot, or be happy to accept a lower return in some skus for the sake of the long run – typically the ones that bring new users to your franchise.
If you would like to get a more practical example of what a pricing strategy model looks like please get in touch via our contact form, and mention this article in the subject so we can email it back to you.
P.S.: in case you are wondering why we don’t call out availability as even more important driver to win in informal trade, it is because getting your pricing right is how you’re going to build that distribution in the first place. That, and trade drives.
Comments