A salty snack manufacturer faced a pricing problem: Should they pass through a cost of goods increase through price per volume or price per unit?
1 Situation Review
Looking for a Solution to Sink Their Teeth Into
A major salty snacks manufacturer was faced with a significant increase in raw material prices due to fluctuation in the commodities markets. To offset these cost increases and break even, the client needed to generate additional revenue equivalent to a 5% increase in retail price for the entire product line. Further analysis by the finance team revealed that the average cost of goods sold was approximately 70%. For marketing, this meant that they could do one of two things: maintain current prices and ask operations to decrease the ounces per package by 7% or simply increase the price per unit by 5%. Both had implications from a shopper as well as competitor standpoint.
2 Opportunity Assessment
Brushing Up on Product and Marketing Options
The hair care category was consistently losing value primarily because of increasing promotions and special deals that the retailer was offering on value brands. This was a strategy encouraged by a competing manufacturer of several value brands. As much as 69.2 % of the value brands, particularly the competitor’s brands, were being sold on deal. Although the value brands represented only approximately one-fifth (20.8%) of the value in the category, these brands were being allocated almost half (44.8%) of the extra, secondary retail locations designed to catch the consumer’s attention. Meanwhile, shoppers were overlooking the higher-margin premium brands, including professional and performance products. These premium brands were being eclipsed by the deep discount promotions and BOGO offers that the retailer was offering on the value brands.
3 Scenario Definition
Was a “Complete” Solution the “Total” Answer?
Middlegame modelling results suggested that shopper response to a price increase would be more favorable to the business than a size decrease. However, the potential actions of competitors faced with the same increase in raw material would still have an impact on the decision. What was the expected outcome if the two main competitors followed the exact same strategy of raising prices while decreasing sizes? What is the expected outcome if those competitors did the opposite, e.g. if the manufacturer decrease size and the competitor increased price?
4 Expectation Analysis
Clear Examination for an Informed Decision
A total of four additional scenarios were tested to address the combinations of price change versus size change for the manufacturer’s portfolio and the competition. These were integrated with the two results assuming no competitive reaction in the Opportunity Assessment. The models for the CIA® platform suggested that softer unit sales declined and improved the dollar sales gain if the competition matched the price increase. The models also estimated that if key competitors followed the size decrease, there would be minimal impact on the decline in unit sales relative to the portfolio taking this action alone. Digging deeper, the CIA® platform displayed the simultaneous impact on the SKUs, the portfolio as a whole, and the total category as well as compared the difference in results across retailers.
5 Client Actions
Results to Smile About
Despite the hesitation to raise prices, the client decided that it was a better overall strategy than to decrease the package size. This leveraged the overall inelastic demand due to such a commanding share of the category across retailers. As expected, the competition reacted with a series of matching price increases over the next two months. After a six-month review, the portfolio was down in units and volume versus the prior period, but more than 84% of retailers actually saw a slight increase in dollar sales of 3.4% to 4.2% which was consistent with the original elasticity analysis.