CHICAGO–(BUSINESS WIRE)–For decades, companies have relied on elasticity as the be-all and end-all determinant when making pricing decisions. What many manufacturers fail to do is fully evaluate a product or brand’s additional elements, such as benefits and messaging, all of which can impact its perceived value. According to a new IRI Point of View, “The Psychology of Pricing: Reshaping Your Elasticity Curve,” when thinking about pricing, brands should combine traditional pricing best practices with product development and marketing initiatives in order to adjust shoppers’ perceived value of a product or brand.
In 2019, roughly 70% of CPG manufacturers stated plans to raise their list price or “take price” by the current timeframe. This is on trend with 2018, when the industry saw nine of the 10 largest CPG manufacturers publicly announce price increases. These price changes are being made in large part due to increased costs for manufacturers. However, consumers aren’t keen on paying more for the same product and retailers don’t want to risk losing customers due to price increases. It’s pertinent that brands don’t just blindly follow competitors on price, but instead, pair price increases with investment in product development and marketing that provides both loyal and new consumers with a product they believe is worth the new, higher price, while giving retailers peace of mind that a product won’t sit on the shelf.
“For more than a decade, some manufacturers have avoided increasing prices, making it more important than ever to use all the tools and insights at their disposal to create success when they do decide to make that leap,” said Ray Florio, partner of Growth Consulting for IRI. “Elasticity coefficients are a reliable piece of information for manufacturers, but they do not serve as a replacement for a sophisticated pricing strategy.”
According to the report, manufacturers should take many factors into consideration when determining a product’s price, including financial, branding, positioning and competitive factors. They should then see if a price increase is feasible under the current elasticity and the potential tradeoffs involved. IRI recommends a three-phased approach for any manufacturer seeking to change its product elasticity, with or without changing the underlying product itself:
Phase 1 – Baselining
Manufacturers should start this process by measuring the impact existing features and benefits have on the brand’s elasticity and competitors’ elasticity. To do this, prioritize the top three to five high-level features (e.g., low sugar, gluten-free, etc.) and then measure their influence using a standard discrete choice exercise with a brand’s most loyal followers as well as first-time triers. Results from this exercise will allow manufacturers to focus on the attributes that will have the biggest impact on willingness to pay and will reduce the brand’s elasticity. If the best attributes are already available, a shift in messaging may be all that is needed. Manufacturers also can use these insights to identify new innovative features that can provide significant growth for future products.
Phase 2 – Conceptualizing
Phase two focuses on taking insights learned during phase one and testing and then refining new messaging across the entire range of in-store and out-of-store marketing levers (e.g., packaging, in-store displays, etc.) that focuses on the features and benefits most likely to reduce elasticity. Product positioning can be as simple as labeling a product “low sugar” or as complex as stating the exact grams of sugar on the packaging. Each message will have a different effect on price elasticity.
Phase 3 – Activating
The final phase focuses on presenting these new changes to retail and preparing them for the upcoming price changes. Start by focusing on the elasticity coefficients of today and then identify where improvements can be made by leveraging the insights derived during the first two phases. Manufacturers should be sensitive to retailers’ concerns and provide a preview of their product and promotional changes, the overall objectives and supporting evidence to achieve stronger buy-in on the resulting price adjustments.
“Price increases should not be automatic but rather a condition of continually revisiting the product for marketing messages, benefit tweaks, packaging upgrades, line extensions and more,” continued Florio. “The value of the product should be continually exercised, with the goal of seeing elasticity evolve as desired, rather than serve as a static, unchanging restriction.”
About the Report
“The Psychology of Pricing: Reshaping Your Elasticity Curve” is a free report available from IRI. To download the report, visit: https://www.iriworldwide.com/en-US/Insights/Publications/The-Psychology-of-Pricing.
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