The 4 Ways CPG Companies Manage Retail Price Increases
There's more than meets the eye to consumer goods retail price increases.
The defining characteristic of the consumer goods industry in the COVID-era is retail price increases. The story is well-known by now. COVID-19-induced lockdowns created a whole bunch of supply chain disruptions.
In the past, supplies were more or less available on demand. In the COVID-19 era, it could take weeks. This panicked corporate buyers, who were suddenly willing to pay premiums to ensure production didn't stop. This panic, and the actual shortages, sent input prices skyrocketing. CPG companies, many with significant market power, passed those costs on to consumers through higher prices.
There's been a lot of talk in the media about retail price increases—are they outpacing inflation? Are they justified? I've written about this and have others, but not much has been written about how companies typically manage price increases. The actual implementation can be tricky because CPG companies do not set the retail price for their products in America—retailers do. Consumer goods companies must balance maintaining their profitability and keeping both retailers (customers) and consumers happy.
This blog post will explore companies' four levers to manage retail price increases: list price changes, pack price architecture, product mix, and promotions.
List Price Changes
One of the most straightforward ways to manage a retail price increase is by implementing a list price change. This involves increasing the price of a single item without making any changes to the product or packaging. When you read about price increases in the media, this is the action they're referring to 99% of the time.
Truthfully, before COVID, manufacturers did everything they could to avoid list price increases. Why? They're a massive pain in the ass to manage. Since manufacturers don't set the shelf price, they must sell to retailers on the price increase. Salespeople, as a general rule, hate doing this.
Sometimes retailers are interested; other times, they're not. Retailers could accept the price increase but keep the shelf price the same or tack on a few pennies for their margin. One thing that they typically won't do is pass on lower list prices to the retail shelf.
List price changes are particularly effective when the price increase is marginal and does not significantly impact the product's perceived value. For instance, a small price increase on a commonly purchased product may not considerably impact customer behavior, and the business can still maintain profitability.
Pack Price Architecture
Pack price architecture involves changing the price of a product based on the quantity purchased. For example, a product previously sold for $5 for eight might now be sold for $4.75 for a pack of six. This lever is particularly effective when the business wants to manage the impact of a price increase on customers. In my experience, this is the preferred method CPG companies use to manage retail price increases.
I once worked for a household storage manufacturer who went this route—boosting the price-per unit while slightly lowering shelf price. Management decided to manage a price increase this way due to history. A competitor had previously dropped the list price for a similar item-looking to gain market share. Retailers, en-masse, nodded their heads and then pocketed the extra margin.
Pack price architecture can also encourage customers to purchase more of a product by offering discounts on larger quantities. This can help to increase revenue and profits even if the price of a single item has been increased.
Product mix involves changing the products that are offered, as well as their pricing. This lever can remove low-profit items from the product line, while adding higher-profit items. For example, a company might discontinue a low-profit item that was previously sold for $5 and replace it with a higher-profit item that is sold for $20. Conagra Brands is a textbook example of this approach. They subbed out low-quality freezer meals with better quality ingredients. The result pushed the product price up from $2.50 to $4.50.
Promotions involve offering discounts or other incentives to encourage customers to purchase products. In the industry, this is called trade—and typically accounts for about 20% of a consumer good's manufacturer's revenue. This lever can effectively manage price increases by offsetting the impact of the increase on the customer. For example, a company might offer a buy-one-get-one-free promotion to help customers adjust to a price increase.
Promotions can also be used to drive sales during slow periods, product launches or to clear out inventory. For example, a company might offer a seasonal promotion to clear out the inventory of a particular product, allowing them to introduce new products and increase revenue.
Managing retail price increases can be a complex process. Still, by using the levers of list price changes, pack price architecture, product mix, and promotions, companies can effectively manage their prices while maintaining a careful balance of customer and consumer satisfaction.