FoodDive: What the cost of a poor pricing strategy means
October 15, 2015-
By Carolyn Heneghan
Pricing is everything in the food and beverage industries, and without a solid strategy, brands can miss out on those price-driven sales.
Sometimes pricing changes can be a success, such as PepsiCo’s 2% sales uptick for its North America snacks division last quarter after making pricing changes. Other times, pricing changes are not so well-received, which Smucker found out after implementing a 9% increase that drove customers to cheaper brands. Smucker later called this move a “misstep” and in July, cut prices for several of its brands by 6%.
Pricing can be all over the place with hundreds of SKUs and dozens of individual price lists for their products, and this can be damaging to a company’s financials.
“The overall company is suffering because of inconsistency in pricing, whether over discounting, retail promotions, and the issue is, the company truly doesn’t know what customers are paying for their products,” said Sean Duclaux, director of industry solutions and partner marketing at PROS. “[There is a] lack of visibility, lack of control, and ultimately a lack of confidence, not in the products, but in the prices that are being set and the prices that the customers are willing to pay for the product.”
Pricing is key to generating more top line revenue, but effective pricing strategy takes into account a range of operational factors as well as consumers’ potential reactions.
Pricing inconsistencies, efficiencies, and nimbleness
Inconsistent pricing can be the bane of many a food or beverage industry salesperson, and it’s the mark of a pricing strategy that could need reconfiguration. Inconsistencies can lead to confusion for customers and the sales team as well as an inability to be nimble enough to adjust along with volatile factors that influence pricing.
“All of a sudden [companies] need to change the culture. Instead of creating the best packaged food item and being able to compete like for like at the product level, [it’s] how do they compete on agility to react to competitive pressures, commodity prices fluctuating across the globe, and responsiveness to their customers’ demands,” said Duclaux. “So we’ve got all these external forces that a company can’t control, but what they can control is the speed at which they react, and the business agility at which they can move.”
Instead of having to manually make changes to dozens of price lists, significantly reducing the number of price lists and the number of people working on them could create a more efficient pricing strategy that can respond faster to changes in the market.
This can reduce the time it takes to change pricing from a couple of weeks to just a few days in some cases, according to Duclaux. “Things changes on a daily basis,” he said. “And if you have to wait 15 days just to change it, you might have just lost to a lot of competitors, because your competitors may be more agile.”
Factors that influence food pricing
Ingredients
Costs of ingredients may stay relatively the same, but unforeseeable events can cause ingredients to rise significantly in cost. For example, the bird flu outbreak this spring led to a countrywide egg shortage and skyrocketing prices. This can either eat into a company’s profits or encourage the company to raise prices to protect its bottom line.
As egg prices soared, General Mills found a solution in an egg alternative from Hampton Creek that enabled the company to respond to an ingredient issue without suffering the backlash that may have come from significantly raising its prices to cover the rising costs of eggs.
This includes high-velocity commodities that can affect the ultimate price of ingredients and the end food product. Without a nimble pricing strategy, it can be difficult for companies to keep up with swings in commodity pricing.
Packaging
The costs of materials can vary, such as the cost of plastics when oil prices fluctuate, or when a company decides to switch to recyclable or plant-based packaging.
Also, a company might offer different-sized packaging to appeal to consumers and revive sales. As soda sales fell, Coca-Cola began producing packs of 7.5-ounce cans, which are significantly smaller than the standard 12-ounce cans. These were meant to appeal to consumers who were cutting back on soda and wanted to drink less without having to give up on their soda habit completely, said Adam Fleck, director of the consumer equity analyst team for Morningstar, Inc. This move benefited Coca-Cola not just in sales volume but in margins, as the company was able to charge more per can to secure higher profits.
Shipping / Transportation / Supply chain
Whether it’s for ingredients or packaging, transportation of products between facilities, or distribution to retailers, shipping costs can be significant and are an important factor of food pricing. Shipping costs can change rapidly as well, particularly as oil prices fluctuate.
“From early 2007 to mid-2008, as fuel prices soared, the cost of shipping food aid climbed by about $50 per ton – a nearly 30 per cent increase, according to the United States Agency for International Development,” OilPrice.comreported.
Having a more efficient supply chain can affect pricing and/or a company’s bottom line.
Promotions and discounts
A company may plan to run a promotion or offer discounts on their product, particularly if the company starts using a larger distributor. Important considerations here are how margins will be impacted and whether the product is priced to where the company can still make money or break even on the sale even when the product is discounted.
Companies have to decide between pricing at a premium, regardless of competitors’ prices, or trying to undercut the competition.
Consumers
Consumers will ultimately determine success or failure of that initiative via purchasing power.
Raising prices, however, does not always cause an immediate backlash from consumers. Consumers are often willing to pay more for innovative products, not just from a flavors standpoint, but in terms of new categories and packaging innovations as well, Fleck said.
Having a smart, efficient, and nimble pricing strategy can mean significant sums of money needed at a time when falling sales and cost-cutting measuresare common across major processed foods companies.
“This is not a cost-cutting initiative; it is truly adding to the top line,” said Duclaux. “This isn’t about implementing solutions so you can cut people. This is about implementing solutions to certainly drive efficiency, but mainly to drive top line revenue.”
What companies risk most if they do not implement an effective pricing strategy is losing their competitive edge.
“The competition in the food industry is like none other that I’ve seen,” said Duclaux. “I’ve seen the different dynamics across industries, and I truly believe the competitive nature within the food, beverage, and consumables industries is really the biggest risk that they have.”