What Retailers Need to Know about CPG Manufacturer’s Pricing Strategies
As a retailer, you hold all the cards when it comes to price setting for the products that appear on your shelves. You get to decide whether you want to price an item as a loss leader, a profit center, a cart filler, or another type. But smart retailers know that just because you don’t have to listen to your partner on the manufacturing side, it doesn’t mean you shouldn’t.
After all, the more a retailer and CPG manufacturer and even the wholesaler can all make their interests align, the better their chances of finding the perfect mix of price, volume, and ultimately, profitability.
All too often, retailers focus too narrowly on their own profit margins, neglecting the needs of their manufacturing or wholesaling partners and failing to see how their needs are often symbiotic with their own. Giant manufacturers may be able to sustain a short-term loss in order to gain a foothold in a certain market or with a certain retailer, but emerging CPGs aren’t in the same financial position. Even though these companies might ultimately bring more value to a retailer, they are often marginalized by one-sided pricing strategies that fail to account for their interests.
Forecasting is critical for CPG companies
In order to offer the best price to their customers, retailers need to work with their CPG partners to develop an accurate forecasting model that lets the manufacturer predict their wholesale and production costs more precisely. With more accurate volume projections, the CPG manufacturer can operate more efficiently and purchase materials at the most optimal prices, which translates into better prices for consumers and better margins for all parties involved.
But achieving this objective requires cooperation up and down the supply chain. A retailer shouldn’t just bring a new product into a cluster of stores as a loss leader or traffic builder if the combination of volume and tight margins ends up squeezing the manufacturer out of business. With the right amount of planning and the proper forecasting, however, the manufacturer might be able to get the prices down to “loss leader” level in a way that more naturally supports the sustainability of its business — and hence the health of the entire ecosystem.
4 tips for retailers to work with CPG manufacturers
What are some of the ways that retailers can collaborate with their CPG partners to arrive at the most optimal pricing strategy for both parties? Here are a few tips:
- Require data analytics to support decision making. Insist that your CPG partner comes to you with data-driven recommendations for their price points. In this era of big data, 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 they’re not using advanced analytics, have them contact Bedrock Analytics immediately.)
- Respond to market dynamics quickly and effectively. In the CPG market, it’s not uncommon for pricing dynamics to shift suddenly in one direction or another. A change in commodity pricing could cause an entire category to raise its prices, for instance, or new and unexpected competition can drive prices notably downward. It’s important for retailers to be aware of these changes and work with their CPG partners to develop new price points and get out ahead of any important fluctuations in the market.
- Engage CPG partners regularly. By frequently engaging CPG partners for a discussion about price points, retailers can keep the communication channels open and work collaboratively to arrive at a price that works to their mutual advantage. We recommend having these discussions at least annually if not quarterly so that you can stay on top of trends in inflation, category dynamics, profits, etc.
- Test, measure and optimize. When it comes to pricing strategies, too many retailers fall into the trap of setting it and forgetting it — that is, they don’t monitor the effect of their pricing strategies on sales and revenue closely enough to know whether the price they set is exactly the right price to propel their business forward. Instead, they should regularly measure their price elasticity, test various price points, and optimize their pricing strategy for optimal results.
- Beyond the Category Captain. We recommend that retailers lean on more than just their category captain for insights. Genius can come from anywhere. Emerging brands can be innovative in more areas than just their products. We have helped many smaller brands be the thought leaders in their categories by leveraging insights at the speed of light.
Bedrock Analytics’ Pricing Storylines can help CPG companies find their competitive advantage and grow their profitability. To learn more about the platform and how it can help build an effective pricing strategy, contact us for a personal demo and consultation.