Balancing Pricing And Promotional Pressures In An Inflationary Market

If you’ve noticed that your volume is suffering more than the pricing elasticity models predicted with your latest round of pricing actions, then you’re not alone. As inflation began to climb earlier this year, your first few price adjustments may have been well-predicted by historical elasticity models. However, in the last few months, many of our clients have seen a more dramatic volume decline with the third or fourth round of price increases compared to what elasticity studies predicted.

Why is this happening, and how can I better position my brand? Acosta’s Revenue Growth Management (RGM) team is here to help.

In traditional CPG elasticity models, both the price elasticity of demand and the cross-price elasticity of demand are accounted for. Still, they do NOT account for the income elasticity of demand. This has become extremely important as food inflation has experienced its largest single-year increase since 1979. Additionally, food-at-home inflation notched up 13.1% higher in July 2022 than the prior year.

Today, elasticity models are less predictive because of the significant consumer price index (CPI) increase for food at home and increased gas and energy prices. To offset this, your products have likely taken three to five price increases to account for increased costs. Unfortunately, the rest of the store has as well, putting significant strain on shoppers.

Here are three ways you can better position your brand in today’s inflationary environment:

1. Understand the shopper’s willingness to pay for your product: What shoppers were willing to pay one year ago differs today. Surveying shoppers around willingness to pay helps us understand how to balance the optimization of revenue and units. In the example below, one item in a brand’s portfolio has plenty of room to increase pricing while still being acceptable to the shopper. However, another size in the portfolio is currently priced at a major psychological threshold. Even a one-cent increase will lead to significant volume loss. Based on these insights, an increase across the total portfolio was clearly not the best strategy. We recommended a selective approach on where to take the price to help recoup increased costs.

2. Mobilize solid promotion plans: Our shopper research showed 87% of shoppers are looking for deals ALL or most of the time when grocery shopping. For shoppers who feel worse off financially than one year ago, they would like retailers to offer deals to help them. Many brands have reduced promotions in the past year, which has proven counterproductive when shoppers are looking for deals now more than ever. As such, it’s key to have relevant and compelling promotions to stand out and be in the shopper’s consideration set when they are in the store. With base pricing significantly higher than last year, many brands don’t yet have clarity on which promotions and promotional price points will now resonate most with shoppers to help them stand out from the competition. We use a two-step process to solve this dilemma.

First, we use our shopper survey capabilities to understand the types of promotions that will drive the most purchase intent– price point, percentage off, buy/get, and so on – and which promotional price points deliver the value shoppers seek.

Then, we run simulations of volume impact by adding promotions using NielsenIQ’s Revenue Management Optimization (RMO) tool. We simulate various levels of feature, display, and price point in the tool to understand what best drives desired results. With this highly granular data – some of it zeroes in on retailer banner or market level – we can help you improve account-specific trade strategies to offset the consumption declines due to base price increases. Our team has ready-made total store models, so we can complete projects in just a few weeks, which is significantly faster than anyone in the marketplace.

3. Evaluate your price/pack architecture to ensure you meet shoppers’ evolving needs: Our shopper research indicates cost-saving actions vary dramatically by shopper. Fifty-one percent are buying more products in bulk or value packs to save money, while 28% are buying smaller package sizes of food to save. Ultimately, it’s important to have products that fit entirely different occasions and shopping types so your brand can fit into whatever cost-saving tactics work best for shoppers and their families.

Monitoring the shifting pack size consumption trends is critical to correctly forecast and prevent out-of-stocks. Our RGM team can help you evaluate versus best-in-class price pack architecture (PPA) by assessing whether:

• A clear PPA exists across the brand’s portfolio
• Sales are well-balanced across pack sizes
• PPA delivers good price curves and matches category dynamics
• Innovation is based on consumer pack needs
• Each pack has a clear role

It’s challenging to know the future and whether retail will ever return to pre-Covid “business as usual.” But we are looking to the future for our clients by investing in Revenue Growth Management (RGM) and helping our partners with best-in-class tools and services to help you make more informed decisions to optimize both revenue and profit. We proudly offer solutions for every budget and can typically turn around most projects in two to four weeks to ensure you get the guidance and results you need quickly. Let us know how we can help.