FIVE WAYS TO PRICE YOUR KEY VALUE ITEMS FOR PROFIT

Whether you’re a retailer or a manufacturer, pricing and promotion spend is one of the largest costs of doing business. But it is also one of the most inefficient. Just this year, the fast-moving consumer goods (FMCG) market saw two consecutive quarters of retail sales decline. And the industry’s response may be adding to the problem.

We’ve seen a slowing of price increases across nearly every category and department, and at the same time, we’ve also seen an increase in promotion frequency. However, these investments have resulted in very little lift and few dollars returned.

So how can manufacturers and retailers win in such an uncertain and changing environment? Through our research, we’ve identified five opportunities to create more efficient price and promotion strategies, reverse negative trends and drive profitability.

MAKE KEY VALUE ITEMS YOUR COMPASS

We know that prices are a big factor in where shoppers choose where to shop. But did you know that only a handful of items, known as key-value items (KVIs), drive more than 50% of shoppers’ perception of a retailer or brand’s overall value? Take an 8-ounce bag of cheese, for example. A shopper may develop a “value perception” based on what they think the price of the cheese should be—thus making it a KVI.

During a recent study of multiple retailers, we found that only 5% of UPCs drove U.S. shoppers’ value perception of the franchises. That’s a lot of importance attributed to a small percentage of items. And in looking at those KVIs, we noticed that 55% of them were over-priced to shopper’s value perception and negatively affected ROI.

Leveraging KVIs can improve shoppers’ value perception of you, drive extra trips into the store and ultimately win a greater share of wallet. For retailers and manufacturers looking to make KVIs their compass, three steps can help drive results:

  • Evaluating which products are most important to the shopper;
  • Determining the value perception they help drive; and
  • Getting the prices right on that 5 % of items within the total store or within your portfolio.

ADJUST UPCS THAT ARE PRICE INSENSITIVE AND UNDERPRICED

In our study, we also saw that 32% of all items were price insensitive and underpriced versus where they should be, meaning that shoppers were not as attuned to price or willing to purchase the product regardless of cost. Given this information, we believe the best way to get the price right on the 5% of items that drive value perception is to shift dollars from products where price isn’t as important to KVIs.

The first step is to identify the price insensitive products within your store or portfolio that are underpriced versus their benchmark. Next, use your underpriced UPCs to invest in your overpriced KVIs to win on price with the items that matter to shoppers and drive profitability.

THINK BIG ON PRICE: FIND THE RIGHT GAP BETWEEN ITEMS

In thinking about price changes, it’s important to not just look at these adjustments from an item perspective but also in the context of portfolios and categories. Many times we see that:

  • 59% of items are priced too aggressively between private labels and branded equivalents.
  • For 33% of items, the value proposition between the private-label and branded products is priced in-line and maximizes overall category sales.
  • One in 10 private-label products isn’t priced aggressively enough to drive shoppers’ willingness to trade between the two and grow overall category sales.

Retailers, for example, can look at their portfolio and try to understand the price gaps between items, such as private-label and national brand offerings. Consider what value each item brings to the marketplace versus the alternative, and then choose the value that maximizes total combined margin or volume. Doing so can help support better pricing strategies.

IMPLEMENT AN OPTIMAL PRICING STRATEGY

On a tactical level, being strategic in how you deploy price is critical. There are many levers around deploying price, with the two biggest being the everyday shelf price and the promoted price.

We’ve developed a simple framework to help marketers understand how to build more effective pricing strategies.

Four strategies for effective pricing

Two points stand out on this chart:

  1. As an industry, many deep promotions on products aren’t impacting the bottom line. But moving high-deep items to the high-shallow bucket could help balance pricing strategies.
  2. It’s important to pay attention to everyday low price (EDLP) products. By understanding when demand is larger for products in the EDLP bucket, retailers and manufacturers can use this demand to capture more share of category.

DEDICATE CIRCULAR AND DISPLAY SPACE FOR THE MOST RESPONSIVE ITEMS

When it comes to promotions, remember that physical in-store space to communicate with shoppers is limited. And companies are giving far too much support to items that aren’t returning the favour:

  • 48% of UPCs receive feature support at some point throughout the year, but only 22% of them respond to this support.
  • From a display perspective, 75% of items receive display support, but only 28% of items are responsive enough to justify that support.

Be thoughtful about the items you feature and put on display by focusing on the ones that drive additional trips and grow baskets. Circulars should focus on driving traffic to the store, while displays should help shoppers build baskets and increase rings in the store.

ARE YOU READY TO PRICE FOR PROFIT?

This all nets down to three big ideas:

  • Win on price with shoppers by investing in KVIs.
  • Ensure proper pricing strategies across all items.
  • Reallocate support to the most responsive items.

These ideas, paired with regular measurement against targets every week, provide a reliable framework that you can use to quickly price items for maximum revenue and profit.

By Morgan Seybert, SVP, Retail Analytics, Nielsen