Brand prosperity is a lot like the root system of a tree. Although hidden beneath the soil, the root system of a tree is the origin of its strength, stability and capacity to flourish. A nourished root system grows a tree that produces a bountiful yield. Conversely, a deprived root system can compromise the tree’s ability to produce at all.
In similar fashion, the root system for a brand must be strong and healthy for the brand to prosper. Each root is an integral part of a brand’s path to not just bear fruit, but flourish. A strong root system for a brand is rooted in a disciplined and methodical Go to Market strategy. This is the sixth in an 8-week series outlining the framework of a successful Go to Market strategy. The previous articles can be found here:
Second: Product Strategy
Third: Production Strategy
Fourth: People (Consumer) Strategy
Fifth: Pathway (Commerce) Strategy
The sixth root in a successful Go to Market strategy is the focus of this article: Pricing Strategy.
Thank you for your interest in this topic. We welcome your feedback and comments, and the opportunity to help you on your journey.
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Despite the best efforts of even the most brilliant business people, if you’re losing money on your product, you can not make it up in volume, try as you might…
Kidding aside, pricing is rightly perceived as one of the more complex elements of a go to market strategy because there are so many two-way factors interacting, each influencing and being influenced – including, unfortunately, emotions and rationalization tendencies of a founder.
Optimal pricing will depend on costs, how competitors are priced, and what potential customers will pay. Finding this optimal number takes time, research and data. Pricing is also strongly correlated to, and, simultaneously influencing and being influenced by:
Pricing is also a strong influencer defining a brand’s addressable market/consumer accessibility, as well as defining trade promotional campaigns, but at the end of the day, building a sustainable pricing model that drives profitability matters most, because without profits, there isn’t an ongoing concern.
Taking a step back, let’s think strategically about pricing over time and by channel (exclusive of cost input drivers). In your early days, your initial pricing is targeted to the highest value consumers - innovator and early adopter consumers who care the most about the brand and who have a willingness to pay more. Long term, consider how your price will evolve over time as consumer adoption matures. Below is a recommendation target we made to a client for pricing evolution over time, overlaid on the consumer adoption curve (for a more detailed treatment of this consumer adoption curve, check out the fourth installment in this series: People (Consumer) Strategy):
By necessity, the goal of a business is to serve a consumer need profitably. And by the way - everyone who touches your product after it leaves your door has the same goal and need, which is why a product you price at $3 out your door might sell at retail for $5.49 - $7.49 after accounting for freight, distributor margin and retailer margin.
Pricing can not be purely cost-based or its price can end up as an outlier on the shelf and/or not reflect your proposition, resulting in poor sales. Further, pricing can not be solely competitive/market based because your costs are not your competitor’s costs and you won’t likely have a sustainable margin to cover your costs.
A quick side bar on the interplay of costs, margin and price: While fixed costs are irrelevant in pricing, your gross margin must suffice to cover fixed costs. Best practice target gross margins for CPG are 40%+ for food & beverage, 50%+ for personal care, and 60%+ for nutritional supplements. As a reminder, gross margin is not simply your cost of goods (COGS). In fact, COGS is only part of the equation, the other being fees incurred to get your product on the shelf – trade spend, retailer fees, distributor fees and brokerage fees.
Quality & Value
Both quality & value are perceptions by the consumer. It’s crucial to step back and be objective when assessing your value and quality, and more importantly, to see it through the lens of the shopper.
Perceived product quality is an abstract judgment formed from intrinsic product attributes (physical characteristics) and extrinsic attributes not part of the physical product (branding, social image, packaging, etc. – and price). Consumers tend to associate high price with high quality and low price with low quality, almost regardless of other attributes.
consumer perceived value = benefits that matter – price
When benefits are larger than price, there’s perceived positive value. When price is larger than benefits, perceived value is insufficient (none or even negative) thus no action is taken (or worse, a negative review is posted).
One way to approach an objective evaluation of value & quality is to create a matrix of features & benefits by comparative product/brand. Following is an example we built for a beverage brand where itself and competitors are across the top and most valued features & benefits are down the side.
(Reference brand: Fruitbelt)
Use caution not to cherry pick features & benefits biased towards making your product look superior as a way to justify a higher price or being more attractive to consumers… That’s your ego talking, not a valid business exercise, and will catch up with you, costing much more in the long run.
Also consider the appropriate segmentation of category offerings when building a matrix like this – choose products similar to your own but know whether you’re in a commodity, premium or super premium segment. In addition to your most similar competitors, it's important to select products across multiple segments as validation of segmentation and your alignment. Assess whether your pricing reflects an alignment to the competition’s proposition and pricing. Consider both unit price and per ounce price in this assessment. Alternatively, if your product is sufficiently differentiated, perhaps you’re pricing to a market gap. Lastly, be mindful of the channel from which you are referencing for pricing comparisons. Results will be skewed and misrepresented if selected products are used from different channels within the same comparison.
If you perform this exercise yourself but want to run it by us for an outside perspective, feel free to send it our way for review: firstname.lastname@example.org. We’d be happy to help.
Pricing strategy ideally is set by account, reflecting distribution & marketing cost inputs and the competitive landscape surrounding each location, but let’s be real – the ability to do this requires granular POS data that can get expensive, so it’s certainly acceptable to work towards it. Pricing by channel or even broad region within a channel would be a healthy accomplishment for an early stage brand. Let’s explore some of the assessments to make.
Understanding pricing by package size for your brand and that of the category/competitors provides a solid grounding in the landscape. Price-pack architecture is more meaningful when you have multiple items in different size and use occasion groupings, but it’s a good next step after the above matrix exercise. Here’s one example of how this can look for a single brand:
Chart courtesy of Scott Sanders.
Another key assessment is comparing the range of price points for specific products or product groups. This chart shows a comparison of each product/group’s every day, promoted, and average price:
In this example most brands have a fairly tight everyday/promoted price architecture. However the brand 2nd from the left has the highest everyday price among the main group and the 3rd lowest promoted price. If their proposition doesn’t warrant the everyday higher price, they could be losing sales. Further, their deep discounting may be resulting in giving up profits (ie, they’ll sell almost the same volume by discounting in line with its competitive group)
Price sensitivity (elasticity)
Moving towards a bit more complexity, a term in the price modeling & analytics world is ‘elasticity’ which mathematically represents how sensitive a group of items are to changes in pricing (ie, expected volume impact from price changes). Without geeking out on the math, I’ll summarize by saying the higher the elasticity value (either positive number or negative number), the higher the sensitivity to pricing, and the less volume will be sold from price increases. Here’s an example:
Here, as price increases, sales rates decline.
It’s important to note that a price elasticity model requires granular data – weekly periods and single account or channel within a limited geographic boundary. This prevents noise from too many variances and variables.
However, elasticity is only one input value in the equation of shopper response. In isolation, an elasticity model is too binary for a real world, dynamic scenario with multiple variables, not to mention it sheds no light on likely consumer response to an entirely new product or a new variation of an existing product. While price elasticity models attempt to predict consumer response, collecting actual shopper response can be a stronger predictor of likely behavior (that said, we know what consumers say and what they do are never aligned, so suffice it to say no method is perfect, but there are consumer survey methods that can narrow this gap). Two approaches to collect likely shopper behavior are a Van Westendorp exercise and a Conjoint analysis.
A Van Westendorp exercise uses consumer surveys to identify acceptable price ranges for different products based on their purchase habits. A Conjoint analysis uses consumer surveys to measure their willingness to pay for a product overall and for various product attributes. I believe these two analyses, in combination with a POS analysis, is a more comprehensive and informed approach than an elasticity model on its own.
As we’ve seen, pricing is a strong influencer of demand, as well as of perceived value & quality. Pricing directly correlates to profitability and is not just margin or competition based. After determining the right price at which to set a product, a good price management process would be as follows:
Price changes for a brand do not happen in isolation or a vacuum. Monitor pricing ongoing for leaders and followers to adjust everyday pricing, along with competitor promotion pricing strategies.
Next week: Promotion Strategy
About The Author...
Michael Movitz has more than 25 years natural/organic products industry experience across retail, manufacturer, broker and market research organizations...