One of the biggest challenges brands face in the CPG industry today is catering to the ever-shifting consumer sentiments and navigating the impact of price elasticity. CPG pricing is crucial: pricing affects the consumer’s perception of a product, and price changes greatly impact consumer behavior and purchasing decisions.
A clear understanding of the current industry situation is necessary to better understand CPG pricing. Several major factors impact companies’ CPG pricing models, and they must be considered and managed accordingly to design an efficient and profitable CPG pricing strategy.
How is the current scenario affecting CPG pricing?
CPG consumption continued its downward slide in 2023 compared to 2022 sales. Despite the 8% lift in dollar sales, unit consumption fell by 2%, meaning that the dollar sales growth is driven exclusively by the rise in prices, while consumers buy less.
- Faced with less and less purchasing power, consumers need to adjust their spending habits. They do so by abandoning brands in favor of better value, like private labels.
In 2022, private labels registered a record 11,3% increase in sales, resulting in $228.6 billion in revenues. Among the categories that saw the most increase in private-label sales were beverages, pet food, and toilet paper.
- Global retail e-commerce sales amounted to almost 6 trillion U.S. dollars worldwide, expected to reach approximately 8.1 trillion by 2026. The increase in online retail options also poses a challenge for CPG companies since they need to tailor their offerings to volatile consumer demand and high expectations.
- CPGs continue to struggle with rising costs of materials and labor and the increasing supply chain disruptions that lead to scarcity of raw materials. They need a CPG pricing strategy appealing to price-constricted consumers but simultaneously able to defend margins.
These three factors pose a big challenge to the CPG industry, which has to change consumer sentiment on one side, while on the other needs to adjust CPG pricing to absorb increasing costs. To compete with private labels and online retailers, brands should implement an effective CPG pricing strategy and carefully reflect upon execution and retail interactions to ensure the new CPG pricing model doesn’t backfire.
Improving CPG pricing: start with market research
Before you do anything else, you need to have a thorough and holistic understanding of the market. In particular, take your time to ask yourself (and your team) these questions:
- What kind of CPG pricing are my competitors following?
- What is the current consumer demand?
- Have there been any increases or decreases in demand recently?
- What are the market dynamics at play?
- Can I notice patterns and trends in consumer behavior?
By answering these questions, you start building a deep understanding of your playground; this knowledge will help you make more informed decisions to adjust your CPG pricing model or design a new one.
Implement a dynamic CPG pricing model for real-time monitoring
Dynamic pricing nowadays is a critical approach to drive growth because it maximizes profit and minimizes loss by automatically adjusting CPG pricing in real-time according to consumer demand. For example, a dynamic pricing strategy will monitor consumer demand and immediately adjust to maximize profit if there’s a surge in demand.
But how to do so?
Data Analytics allows companies to adjust prices based on demand, seasonality, competitors’ strategies, and other factors to achieve real-time pricing optimization and responsiveness to market changes. This means that, once implemented, your CPG pricing strategy will be monitored at all times, ensuring it is always optimized to follow every change in the market.
You can learn more about data analytics in CPG pricing here.
Switch from cost-based to value-based pricing
Most businesses in the industry adopt cost-based CPG pricing; this approach, however, is not flexible enough to survive the hectic times we are experiencing. Cost-based pricing presents two major issues:
- It doesn’t take into account external factors like competitors’ pricing or demand;
- It doesn’t prioritize a product’s perceived value, with the risk of missing out on an opportunity for higher profits.
Switching to value-based ensures a more resilient, profitable CPG pricing model. To implement this approach, companies need to leverage the power of data to better understand their portfolio, their audience, and the market.
Leverage trade promotion according to your CPG pricing goals
When it comes to CPG pricing, promotions play a very important role. You can use promotions strategically to drive volumes, increase market shares and catch new customer segments.
In the last year, we have seen a drastic promotion reduction as manufacturers desperately tried to absorb rising costs and manage supply shortages. However, it might be time for companies to reinvest in trade spending to increase share, attract new customers, and reset marketplace dynamics and prices across retailers.
Invest in advanced analytics to improve the CPG pricing strategy
Companies aren’t left alone in facing the current challenges. By collaborating with external partners like Tredence, they can learn to leverage the power of data to improve their CPG pricing model. CPG Data Analytics can prove extremely valuable in making data-driven decisions and enable predictive modeling to optimize CPG pricing strategy.
Data analysis improves scenario planning as well. Understanding pricing dynamics allow companies to run realistic simulations testing a CPG pricing strategy under different variables:
- inflation increases
- shifts in demand
- competitors’ strategies
- consumers’ spending power or behavior
In this way, companies can make data-driven decisions and make sure their CPG pricing strategy is efficient enough to succeed.
Rethink your CPG pricing model architecture
Moments of change like the one CPG companies are living in are a challenge but should also be seen as an opportunity to rethink your whole pricing system. Is your portfolio optimized? How do you display and promote different products across channels? How frequent are your promotions, and how huge are the discounts you offer?
Now is the time to rethink your strategy and prepare for the new equilibrium that the market will reach. Focus, particularly on tailoring a CPG pricing model for your premium products, prioritizing the offerings that deliver better customer values. As important variables like inflation, consumer behavior, and costs keep changing, there is an opportunity to improve your CPG pricing strategy to navigate the market and gain competitive advantage.
Commit to clear communication on your CPG pricing model.
As reported by Nielsen, prices keep rising across all areas of the consumer packaged goods industry. CPG pricing has increased for eggs, fruits and vegetables, canned goods (especially canned mushrooms), soap, and pet food. With inflation still on the rise and soaring production costs, it looks inevitable that CPG companies will keep raising their prices.
This is no good news for consumers, but is there a smart way to communicate your new CPG pricing model?
As in many other situations, communication is key. Keep an honest approach with your customers and retailers: be clear and transparent about your change in CPG pricing and explain the reasons behind it, trying to shift the focus on the value, quality, and experience you provide. Take your time to craft an execution approach to minimize friction and maintain trust.
Improve your CPG pricing with the power of data
CPG companies are faced with many challenges in the current scenario. Rising costs, changes in consumer behavior, and shopping habits are putting manufacturers in a chokehold. But with crisis comes opportunities, and this is the moment to rethink your CPG pricing to increase revenue and profit, drive growth and gain market share.
Companies need to be careful of the CPG pricing strategy they decide to implement and how they execute it to get a positive response from consumers and retailers. Partnering up with CPG data analytics companies like Tredence ensures the support of experience, expertise, and state-of-the-art technology to navigate the market without going under.
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