SUMMARY: When retailers compete on price and rollbacks are market-wide, retail traffic trends rarely change. More importantly, Nielsen research shows that price rollbacks can actually reduce category dollars, making an effective pricing strategy a necessity.

Rob Schram, Vice President Analytic Consulting, The Nielsen Company

When commodity costs for foods rose dramatically in 2008, most manufacturers were forced to raise prices to protect margins—some more than once. Once commodity prices dropped, retailers put pressure on manufacturers to lower prices. But as the Great Recession took hold and consumers cut back on spending, manufacturers wanted higher prices to stick to compensate for the flat unit growth experienced in most categories.

And so the price wars began. And true to life, in war there are no winners. When retailers compete on price and rollbacks are market-wide, there are no inherent traffic gains. In fact, Nielsen research shows that price rollbacks can actually reduce category dollars.

Profitable Pricing
Retailers intending to fight on price better know which categories to target or they will be fighting a losing battle. Price elasticity is a measure of consumers’ likelihood to purchase in relation to a change in price. If you raise prices on categories with a price elasticity of less than one, or take a price rollback, you can actually decrease category sales. It’s a delicate balancing act. A price rollback may slightly increase category volume, but not as much as price goes down—so dollar sales actually go down. And vice versa on price increases—sales go up, but not as much as volume goes down.

Pinpointing best-bet categories requires knowing how elastic they are to price changes. High-elasticity categories are more sensitive to price changes because they are considered less of a necessity. When the opportunity cost of buying these products become too high, consumers opt out. These categories are typically commoditized products with low differentiation. Examples include:

• Paper towels
• Canned vegetables
• Canned pet food
• Canned fruit
• Incontinence care

Conversely, low-elasticity categories are more insensitive to price changes because they are typically the “must have” items that consumers will continue to buy no matter the price. These categories are typically perishable, convenient and are less commoditized. Examples include:

• Sliced cheese
• Dry pet food
• Macaroni & cheese
• Frozen side dishes
• Deli meat
• Bath tissue
• Microwaveable meals

Six Keys to Successful Price Planning

1. Plan pricing from two starting points – supply side / demand side. Define profit goals by forecasting the cost of goods, labor and transportation costs and plant capacity. And understand consumers’ price sensitivity to both your price and your competitor’s.
2. Establish a cyclical price management process. From planning and implementing to tracking, maintaining on-going control of the process will ensure that profit requirements are met and promotion response is achieved.
3. Take a portfolio approach. Understanding the price elasticity of each item in the portfolio in relation to the profit impact of a price increase provides a path to meeting corporate profit goals in a unified approach.
4. Focus on hard metrics at the center. Hard metrics with common definitions like shelf prices, list prices shipments and financials across brand groups must be the focus of any price planning approach.
5. Establish KPI’s and milestones. Determine scorecards for all key brands and track results and the execution. Be prepared to adjust the plan to react to marketplace changes and competitive initiatives.
6. Endorse and enforce. A portfolio approach means that some brands will take price changes and other will not. All parties in the process must follow the process and understand the broader goals.

Price wars are a long-term proposition, where over-reacting often leads to failure. Long-term winners innovate and differentiate and know that while price is important, value is more important. Careful planning, research and ongoing management are the steps it takes to win the war on price.

1. Take higher margins in less price-sensitive categories
Ranking categories based on purchase frequency is a fast and inexpensive way of identifying categories that are least sensitive to higher pricing.  Shoppers are less likely to remember pricing on products purchased only once or twice per year. For higher-priced products, however, shoppers are more likely to shop around for the best deal.

2. Lower the thermostat in stores this winter
Your customers will be wearing coats anyway.  This will save on heating costs while promoting a “green” image.  Retailers can post a sign on the front door, letting shoppers know how lowering the heat helps the environment.  Also consider turning down the air conditioning in the summertime.

3. Publish your own $100/week family menu
Supermarkets can create a weekly meal plan for a family of four to eat nutritious meals from easy recipes tied to key items. Look to your vendors for meal ideas or consider ways to promote your own store brands. Consider showing price comparisons to fast food restaurants.

4. Tie discounts to large or frequent trips
Why offer red-hot door-buster deals that do nothing to generate additional purchases?  Instead, consider offering hot prices for shoppers with a $100 purchase.  Supermarkets may consider a special deal for shoppers with $500 in receipts over the course of a month.

5. Expand beyond your channel’s traditional product mix
What’s stopping grocers from selling video games or electronics stores from selling snacks?  Convenience and liquor stores also have a huge opportunity to sell products appealing to men, like tools, gadgets, and video games. What’s more, grocers can take higher margins on “non-grocery” items, since shoppers buying electronics or clothes in supermarkets are looking for convenience and fewer trips — not always the lowest price.

6. Maintain competitive pricing in most frequently-shopped categories
Shoppers can recognize a high price on the products they buy weekly, whether it’s milk, bread, soda, or diapers.  To give the appearance of low prices, retailers need to keep these items priced competitively, even if those low prices are subsidized by less price-sensitive items.

7. Disguise store brands
Consumers can usually spot store brands positioned as a low-cost alternative to a national brand.  But in the past few years, savvy retailers are developing premium, multi-tiered store brands. Some retailers, like Walmart, downplay their store brands with different brand names for each department or category.

8. Support organic, natural and green products regardless of sales
The growth of organic products may slow during this economic downturn, but featuring healthy and environmentally sustainable products will help to boost a retailer’s banner equity.  Organic, natural, and green products project a positive image for retailers — and when the economy recovers, retailers will want to be known for more than just low prices.

9. Get shoppers to try premium private label products
No one will know if your private label salad dressing is as good as the national brands if they don’t try it.  Shoppers are creatures of habit, and changing habits takes some effort.  Offer trial sizes, $1-sizes, or 100-calorie packs.  Or, consider featuring one private label product each week with a free unit to shoppers spending $100.  Shopper taste comparison demonstrations in the store may also help to boost private label products.

10. Make a good impression on new shoppers
The struggling U.S. economy is significantly affecting how and where people shop, with consumers switching between both brands and retailers.  Now is not the time to cut corners on factors that will negatively impact shoppers’ experience.  Don’t let the checkout lines get too long, remove the used tissues and flyers from the bottoms of carts, keep the conveyor belt clean, and treat every shopper like it’s their first visit to your store.

Read more about how to cope during difficult economic times in “Consumer Insight.”

View the January 2009 issue of “Consumer Insight.”