Inflation has been top of mind for both consumers and businesses, especially companies in the CPG sector. The current environment, spurred by the COVID-bounce back and supply chain disruptions, has implications for revenue growth management for CPG companies.
This was a topic of discussion during our past roundtable, “Inflation Strikes Back: What does it mean for revenue growth management in consumer goods?” featuring George Bobin, Head of Revenue Growth Management at Pernod Ricard, Adam Ben-Yousef, Global VP at o9 Solutions, and Victor Farnese, Director Revenue Solutions at o9 Solutions. Here are three great takeaways from the session.
Determining a price increase strategy for each product segmentation is a challenge in the current environment
To kick off the discussion, George pointed out that many companies are raising prices to offset supply constraints but are doing so at a time when consumers’ incomes are not keeping pace with inflation, which reduces their purchasing power.
Companies are also dealing with the following factors:
1. Market dynamics among product segments can differ substantially between standard products, where inflation has an acute impact, and premium/super-premium products, where companies are more able to set pricing in the current environment.
2. Competitors could start making impulsive, short-term decisions that can potentially ruin their own brand equity. However, if other companies follow suit, it could potentially create a race to the bottom, in which consumers begin to devalue the segment industry-wide.
3. Stakeholders are applying pressure for further revenue growth to offset increasing costs.
To meet multiple targets, George says companies should focus on introducing new product innovations within the core brand, but launch at a price premium. This strategy can act as a key lever to support a halo effect that drives price growth across the whole trademark and potentially elevates the whole category. Additionally, it’s also necessary to define key volume items and key-value items in order to split the pricing strategy based upon the portfolio category and execute effective tactics across each group.
Use different approaches for promoting key volume and key-value items
George also spoke about the best commercial strategies for key volume items and key-value items. When marketing key volume items, companies should use conservative price increases aligned with competition and category inflation and try to promote items as frequently as possible. However, when marketing key value items, companies should use bold, above-market price increases. Companies should also focus on a key-value item’s exclusivity and promote it as a single packet, instead of as a co-pack, which is more effective when promoting key volume items.
Keep communications open with your suppliers
During the open discussion, an aim10x Innovators Network member mentioned that inflation may have created an environment where price increases may be more acceptable. However, companies should still be diligent in holding their suppliers accountable for passing costs downstream. Companies, especially big-box retailers, should ask suppliers what is driving cost increases, such as ingredient costs, transportation costs, etc., to see if there’s a chance to work together to keep costs manageable.
It’s an opportunity to do a reset of the whole pricing architecture, as well as the packaging,” says Denis Donelon. “Maybe there’s something disruptive that could avoid a price increase, but at the same time, help both parties achieve their overall goal of managing revenue goals and managing cost goals.”