Last quarter many CPG companies including P&G reported increase in profit despite declining or stagnant sales mainly because of the increase in product prices. Sales were slow because of the economy, cost sensitive customers shifted to cheaper and private label options. Profits increased faster than sales growth because CPG brands were able to charge a higher price to brand conscious customers.
Are higher prices alone enough? While higher prices delivered higher profit over last period continuing price increase is not a viable strategy. There are challenges from stores and other competitors. Stores stepped up their battle on price increases and stole customers by increasing private label offerings. Brands cannot continue to ignore sales growth. Take a look at P&G’s revenue and profit numbers and growth over past four years.
Their profit growth has been positive but the rate of growth has decreased since 2006. Mr. Lafley, the outgoing CEO of P&G, has this to say
“You have to see reality as it is. In every recession there are hosts of compensating consumer behaviors as they manage a more modest budget. We have to expand our portfolios to serve the needs of those consumers. I think a lot of that is going to last.”
To this end every business unit a P&G is working on reaching wider customer base with a broad price range of products. They are developing both super-premium products that can be sold at higher price premium than current products and value products that appeal to cost conscious customers.
Nestle, another CPG, has already outlined multi price point products as its strategy. Multi version pricing is exactly the solution for increasing revenue and profits. It is about increasing product lines and keep the customers within your brand family. When the economy turns around it is easier to up-sell to your own customers than acquiring customers you lost to the competition.
But the challenge is every new product line comes with big costs. Even though R&D and productions can be piggybacked on previous lines, the biggest cost item comes from marketing and sales. There are also the risks of cannibalization, new brands steering sales and resources away from current brands and whether or not customers will turn to the premium brands when times turn around. Implementing a multi version strategy without spreading the resources too thin is what sets great companies apart from the rest.