Retailers are taking a hands-on approach to pricing decisions as they try to balance shopping elasticity with rising costs. According to the US Bureau of Labor Statistics report in March 2023, the Consumer Price Index increased 6.0 percent for the 12 months ending February, while the food index increased 9.5 percent over the last year. Canada is on par, but elsewhere in the world the increases are even steeper. According to an April 2023 study by Trading Economics, food price inflation is expected to top 19% in the EU and UK in the next year.
Retailers including Walmart, Albertson, Target, and Tesco have made headlines this year as they attempt to halt manufacturer list price increases on behalf of their shoppers. To this end, most have invested heavily in internal teams to maintain a pulse on commodity, labor, and end-to-end value chain costs to inform negotiations and partnership strategies with vendors, and we are seeing more retail C-suite oversight of pricing decisions.
What steps can brand leaders take now? Our Simpactful pricing experts weigh in:
1) Justify your increases: Many top retailers (Walmart, Costco, and Tesco, among others) carefully consider whether a pricing increase is “justified.” For example, they expect vendors to share commodity and other cost increases, and what percentage of the Total Delivered Costs these inputs comprise. They will do the math with the information provided to see if a price increase is “justified,” or to create negotiation leverage. “Most suppliers are hesitant to share specific details of their TDC’s, packaging or processing. However, sharing what you can about the inflation you are managing across elements from formula, packaging, freight or even labor, and the percentage of the TDC’s these impact, can help to convince the retailer increases are justified,” shares Todd Ruberg, Simpactful Founding Partner and experienced sales leader.
2) Evaluate your end-to-end costs: Review total value chain costs to determine if there are any areas where you can reduce expenses. As commodity costs fall be sure to negotiate with your suppliers to capture these benefits. It’s also critical to identify any opportunities for more efficient production and shipment of your product portfolio. “We are seeing manufacturers step up their efforts to utilize value stream mapping, loss analysis, and competitive benchmarking to identify cost savings opportunities,” shares Lindsay McShane, Simpactful Senior Partner and Supply Chain practice leader. This approach may allow you to maintain profitability without raising prices fully, or it can enable reinvestment in strategic growth categories to build a competitive advantage.
3) Be surgical about portfolio price increases: Retailers are more apt to accept a price increase if you have a solid justification, or if you can pass along price increases in smaller pockets versus an across-the-board move. Your brand pricing strategy and pack-price architecture should incorporate consumer, customer, company, and competitive impacts in pricing decisions. This means understanding consumer price elasticity, retailer, as well as, your cost drivers, and the competitive landscape for your branded products. “In our Revenue Growth Management practice, we take a holistic approach to assess and mine pricing opportunities across the Omnichannel spectrum. We work with clients to create smart pricing strategies and tactical pricing recommendations without undermining value for shoppers or retailers,” comments Mike Tolkowsky, Simpactful Senior Partner and RGM practice leader.
4) Change your assortment or shelving strategy: Tailor your shelf focus on profitable products that create value for retailers and consumers. This can be accomplished through assortment optimization, shelving, promotional, and marketing efforts. “Shopper behavior is changing in response to inflation with many beginning to ‘trade down’ and rely more heavily on promotions. We help clients evaluate and modify their Price Pack Architecture and promotional strategies to leverage this changed shopper dynamic,” shares Jose Rodriguez, Simpactful Senior Consultant.
5) Evolve your channel strategy: While it is important to serve shoppers where they are, it makes sense to frequently evaluate channel mix and the winners of the future. “We have experience in developing customer segmentation strategies and retailer-level P&L analyses for greater visibility to the loaded costs and profitability prospects of each channel partner,” comments Ian Radcliffe, Simpactful European Lead. From there, Commercial Leaders can better set channel investment priorities, make tough resource choices, and scale or stand-up efforts around DTC or Social Commerce to help improve the channel margin mix.
6) Innovate to increase your value proposition or to cut costs: Focus on enhancing the value of your products or services. By improving quality, adding features, delivering ease, or offering better customer experience, you may be able to justify maintaining your prices or avoid direct cost comparisons between products. “As a part of this process, it is critical to conduct fact-based pricing assessment and research that helps to validate your pricing strategy and cost assumptions as retailers will want to understand this” says Marcy Selva, who specializes in Commercial Planning and Pitch development.
7) Drive loyalty: If you cannot raise prices in the short term, consider how you might extract more value from each shopper by offering value through long-term relationships. Subscription, loyalty, and CRM programs may help you grow share and drive volume to offset reduced margins. Simpactful’s team of Digital Transformation Experts can help you develop a strategy and implement the systems and capability to quickly scale these types of programs.
Delivering the P&L is undoubtedly going to be more challenging in the current global environment – but savvy leaders will shift strategies and tactics and find a way forward that creates value for consumers, retailers, and brands. Simpactful’s team with multi-functional practitioners has both retail and brand experience and can help you avoid pricing paralysis.
Simpactful can help! To learn more about our pricing capabilities and how we can help you, contact our team today at email@example.com or 925-234-6394. Visit www.simpactful.com