In part one of this series, we looked at what a retailer needs to know about CPG manufacturers’ pricing strategies, pointing out that if the two parties can work together to build accurate forecasts and volume goals, they are more likely to arrive at a price point that delivers the optimal revenue margins they both seek. In today’s post, our goal is to reverse the lens and shed light on what CPG manufacturers need to know about the pricing strategies of their retail partners.
Let’s face it — price setting can be a frustrating exercise for CPG manufacturers. You have very little say in the final price that your product actually sells for, and if you’ve ever recommended a pricing strategy that you think makes complete sense for a given market only to have the price altered dramatically by the retailer, you’re not alone.
Know your retail partners’ overall pricing strategy
The first thing to know about retailers’ pricing strategies is that they each have their own distinct approach. Walmart is notorious for driving down costs as much as possible, squeezing their CPG partners’ margins tight. Meanwhile, Safeway tends to have higher prices than other grocery stores, but they make up for it by running promotional discounts on a frequent and regular basis. Before making any type of pricing recommendation, it’s important to understand your retail partner’s overall pricing strategy.
Understanding retailers’ product categories
Retailers bucket every product on their shelves into one of several categories, depending on how it fits into their overall sales strategy. Some of the most common categories that your product might fall into include “loss leader” (products intended to get customers in the door to buy other products, even if it means taking a loss on the original product), “cart filler” (products that the customer maybe didn’t intend to buy but couldn’t pass up), and “profit center” (expensive products that contribute mightily to the retailer’s margin mix).
Different retailers might bucket the same product into different categories depending on their specific goals, but once your product is categorized one way or the other, it becomes very difficult to convince the retailer to price it differently, as they have mandatory margin ranges for each category. The best bet instead is to try to understand your retail partner’s categories and position your product as falling into a certain category right from the beginning.
Consider margin blending and bonus incentives
Sometimes, it takes a little creativity to arrive at the price point you’re seeking. If your initial offer is rebuffed and the retailer doesn’t seem willing to budge on a particular product’s price, you can consider combining the product with another in your portfolio to reach a blended margin that makes sense for both parties. It may be possible to convince the retailer to take lesser margins on your low-end products, knowing that they can make up the revenue difference by selling your high-end products at higher margins. As long as the blended margin is in their acceptable range (typically around 4 – 5%), they’ll be happy.
Another creative way to strike a pricing deal with your retail partners is by incentivizing them to achieve certain volume thresholds. By implementing a bonus structure, retailers will often feel more comfortable with a certain price point and might even be willing to give up some of their margin if certain volume goals are reached. A bonus structure can be a great way to create a win-win for everyone.
Buyers don’t have final say
You and your retail buyer might come to an agreement on a price that seems to make sense for both of you, but several days later they’ll sometimes come back and give a completely different price altogether. What happened? Unfortunately, the buyer doesn’t always have total say over pricing decisions. Many retailers employ pricing optimization software and teams of people in a pricing departments that look at the manufacturer’s recommendations, buyer recommendations, its corporate portfolio, online and physical competitive pricing and other variables to arrive at a final decision. In most cases, there’s not much you can do to change their mind. All you can do is accept their decision and do your best to come back with data-driven pricing recommendations the next time your product’s pricing is up for review.
In fact, be sure to provide data-driven pricing recommendations right from the get-go. In this era of data & transparency, prices should never be decided by gut. CPG manufacturers should run a comprehensive analysis examining all of the factors that go into their recommendations and back it up with data. If you’re not already using advanced analytics, contact Bedrock Analytics today to learn how our powerful analytics platform can help you arrive at exactly the right price points to recommend to your retail partners.