INCREASE OR DOWNSIZING?
EVERYDAY LOW PRICE OR HI-LO STRATERGY?
ANY DECISION YOU MAKE CAN IMPACT YOUR BRAND By Nguyen Phuong Thao - Head of Advanced Analytics Consulting
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.
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 DYNAMICS 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.
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
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
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.
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.
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 AND CONSUMER DYNAMICS 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.
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.
PRICE CHANGE VS. PACK CHANGE 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.
MAKE CONFIDENT, DATA-DRIVEN PRICING DECISIONS 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.