How to get the pricing right - pricing strategy for consumer products
Could be applied to service as well.
Hi Friends👋
Thanks to all the new subscribers since my last post. This keeps me motivated. If you haven’t subscribed yet, I would encourage you to do so. I hope this newsletter will add value in building perspective and enabling you with tools you require to succeed in consumer space / e-commerce sector.
So far we have covered consumer research, some aspects of promotion, product, place (channel strategy), but we haven’t talk of the trickiest of all - pricing. And this is the most interesting subject in consumer space. It is combination of economics, psychology, mathematics. So for this week, I brought you - pricing of 4P’s. As promised, only byte size.
Let’s start with a hypothetical case :
Imagine you are working with a company that sell disease specific SKUs in the market - All kind of healthy beverages, yoghurt, Probiotic etc. Targeted specific to people who have stress, health issues etc. Recently you have launched yoghurt product line especially for diabetic patients in different flavors - D ’cool. As a category manager of the Yoghurt, you will be making pricing decisions. You will be working with brand managers, analytics team on this. How to arrive at the price-point that meets your category objective 🤯?
— You need to find the combination of market share + margin = profitability in the long term.
— Need to understand how value is created for different target segment. What are the psychological, functional (utility perspective), monetary benefits that you are offering to your customer?
— Is this a premium product? Align your price to the target segments for your product. For example - if Positioning of your product is luxury item and for high-income target segment, your pricing structure should reflect that.
— How the change in price affect the demand of the product? Is the price aligned to your category goals? (Walmart would be a great example to show how category goals are important for pricing decisions. Walmart strategy was to provide a deep discount on disposable diapers that led to frequent repeat visit by consumers (Parents). So although they were making losses on Disposable diapers, their other categories grew because of more footfall in store. If your category goal is to drive no. of shoppers in the store, your pricing should be aligned with that goal.)
— Which pricing method should you follow? (Cost-plus pricing, competitive pricing, value based pricing). What follows is value based pricing:
Product analysis
D ’cool is fruit-flavored yoghurt.
It is sugar free. The extensive R&D has gone into the product development. The yoghurt can be enjoyed by Diabetic patients without any consequence.
Benefits it provides
Psychological benefits - Diabetic patients who wants to try new things like yoghurt, they can enjoy D’ cool without worrying about any consequences.
Functional benefits - No compromise on taste. It will taste exactly the same as yoghurt with sugar because of a secret ingredient.
Target segment
Diabetic patients (Of age 35-60)
Income - at this age, target segment will have comparatively high disposable income. Initially, you decided to focus on middle to high level income target segment.
Step 1- Calculate the cost of 200 ml of 1 yoghurt box
This will work as initial price-point. This will give you the starting price-point, if you go below this, you will incur losses. (Initially you can choose to sell at discount to capture the market).
This is the simplistic version of costing. You can make add more details into it. (Variable cost, fixed cost). You should also be able to recover your R&D cost. But for today’s purpose, we have initial cost which is ~25 Rs (Breakeven point). That’s the minimum price of 200 ml one yoghurt pack (without retailer, distributor margin)
Step-2 : Align your brand positioning strategy to your pricing
Brand positioning is point of difference. How are you doing things differently from the existing choices available for your target segment? You should be paid for the value that you create. Hence, your pricing is the function of the value that you bring to the table.
So let’s define the positioning of D ’cool.
More value you add, more you can ask from the customer. The purpose of doing this exercise is to understand all the parameters that will influence your price.
Step 3 : Understand competition in the market (Comparative price / competitive pricing)
Next, you should be looking at close substitutes available in the market - regular price, price after discount, spend on marketing, their target segments, market share, features and benefits.
Step 4 : Understand the demand-supply dynamics for your product
There comes your Microeconomics 101. (Price elasticity)
Let’s apply this.
Say you choose 60 Rs as your price point. At this price-point, you would be able to sell at 80% margin and 10% promotional discount.
At this price point, you would be able to sell 1000 units. Your overall profit would be 19,900 rs.
But if you reduce your price point by 5 Rs. you would be able to sell more units - 1500 rs. Your overall profit would be higher.
You can do sensitivity analysis to make a final decision.
In upcoming posts, we will see how conjoint analysis can help us to derive value from each and every attribute of the product. What we have covered today is the basic fundamentals of pricing step by step.
One of the book that I read as a textbook during my MBA- Thinking fast and slow undoubtedly left a mark on me. I am certain that most of the subscriber would have heard or read the book. If not, rush rush. Pricing is a fascinating area and cognitive biases and all affect consumer behavior. (But that conversation is for some other time.)
For now, sit back, relax, read this and then off to your weekend.