By Nguyen Phuong Thao - Head of Advanced Analytics Consulting

Consumer packaged goods (CPG) companies in Vietnam are looking for pockets of growth. But market no longer at its boom time, competition is becoming fiercer and even organic growth is a challenge to achieve. In such an environment, it’s tempting to consider changes in pricing strategy.

There are complicated issues facing brand strategists. On one hand, managing price is a critically important lever to increase profitability and generate funds for investment. On the other hand, significant price changes in either direction can have unexpected effects on the market. The pricing strategy is also highly dependent on the specific products’ price elasticity, or, consumers’ willingness to pay a different price for a product without affecting demand. Nielsen’s 2016 Global Benchmark Analysis showed that the most elastic categories globally were found mostly in food categories, but ran the gamut from dishwashing liquid to confectionary and toilet paper. However, the least elastic global categories all fell within personal care.

With so many factors affecting your bottom line, it can be difficult to determine the best way to price your product so it drives profit and customer loyalty. Should you increase price to release margin pressure, or decrease price to encourage trial and drive volume? Would a downsizing work better than a straight-up price increase? Shall my brand adopt an EDLP or Hi-Lo strategy. Below are Nielsen’s guide to key factors you should consider before settling your decision.

Brand role in portfolio. A product’s role in the corporate portfolio and where it is in its life-stage are two key internal determinants of a price strategy. For example, if a product is maturing, but not brand new in its lifecycle, the corporate objective will typically shift from volume growth to profit growth, so a price increase might make sense. On the other hand, if a brand is a cash cow, a company will generally be content to accept volume loss, as long as the brand generates a predictable and steady stream of profit and as long as managing the brand does not divert marketing and sales resources from the other brands that are growing. In term of day-to-day strategy, a brand that is a competitive fighter (i.e. spoiler) can adopt an EDLP strategy so it can run on an auto-pilot mode without much investment into trade promotion. Strategy should frame all risks – including how changing product price could potentially impact other areas of the overall strategy. Ultimately, all pricing and promotion actions should ladder up to an overarching strategy for the business.

Brand Equity. How strong is your brand equity? The answer to this question can make or break a price advance. Strong brands (well-differentiated products with high share and brand equity) lower the risk of a price increase. Another important question is whether one’s strength is linked more to “own price” or more to “price gap.” If “own price” is the key, then, if you go up a dime, you lose no matter what competition does; but if price gap is key, you are insulated if (but only if) competition matches your dime increase. A weaker brand should aim for a Hi-Lo strategy instead of EDLP to excite the market with promotions from time to time.

Profitability and Price Elasticity Insights. Sometimes, the decision to adopt a particular pricing strategy is purely a quantitative matter, and strategic issues don’t come into it. EDLP products tend to have relatively high everyday price elasticity, and enjoy relatively low lift from trade promotion activities. Products priced using a high-low strategy tend to show the opposite pattern—relatively lower everyday price sensitivity and high promotion lifts.

Brand trends. Another indicator of the safety or riskiness of a price increase is whether the brand is getting stronger or weaker at the time of the price increase. If the brand is getting stronger, the risk is lower, and vice versa.

Product margin. A product with lower margins can afford more volume loss before the price change leads to a significant overall fall in profit, all else being equal. Cost structure also matters — products whose costs are primarily variable are in a better position to raise price than if fixed costs are more important, because you can easily lower your costs by producing less, if necessary. Another cost-structure example is that products whose supply chain is more vertically integrated will typically have more cushion in handling pricing contingencies.

Velocity. A brand with SKUs in its portfolio that “turn” slowly may lose some distribution points with a price increase. This results in even a greater loss in volume than what modeling would have suggested.

Category. The EDLP strategy is suitable for categories such as personal care, baby/ family products and healthcare products, which are low on “expandable usage.” For example, having more bottles of shampoo in the house would not typically lead you to wash your hair more often (not like snacks, which are high on expandable usage: having more snack products likely leads to more snack usage). That meant that an emphasis on deals would be counterproductive–because people would buy in bulk only or mostly on deal, without buying more of the product than they would otherwise need.

Consumer Dynamics. The question to be raised here is “Are consumers loyal?”. Depending on the nature of the category, the impact of a price change can be very big or minimal. Cigarettes are among the categories enjoying a lower price elasticity due to the stickiness of the product, while an impulsive category like snacks would be more sensitive to price change as opposed to category toward the necessity end of the spectrum like Ready-to-drink milk. If the category is growing strongly, then the impact of price increase can be dampened, while brands in a stagnant or declining category should be more cautious with the pricing action.

An alternative option to straight-up price increase is downsizing. Consumers are generally less sensitive about pack size change than price chance. A Nielsen study done neighboring countries have shown that the impact from pack size change is generally 20-65% less than the expected loss caused by price increase. However, manufacturers need to caution on the deployment of new pack sizes into the market to avoid consumers making direct comparison on price per volume. There have been cases where the old and new pack sizes are both available on the same shelf for up to 1.5 years.

Companies devote significant time and resources to finding the right price to fit their business objectives. In fact, many have entire departments devoted to just this task. Are you confident in your pricing decisions and trade promotions? Contact your Nielsen Representative to learn more and optimize your pricing and promotion activities.
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