Pricing Direction For Recessionary Times – Higher

Marketers are usually obsessed with market share and top line growth. In the recessionary times when customers are feeling the pinch and switching to private labels one would expect a price war among the major CPG labels for market share. But exactly the opposite is happening. There are four news stories from  recent Wall Street Journal issues:

  1. Heinz Profit Rises 11% Amid Price Increases

  2. Higher Prices Fuel Nestlé’s Profit

  3. Higher Prices Propel Unilever Earnings

  4. P&G, Others Are Confident Higher Prices Will Stick

Of course this increase in profit with increase in price point to pricing inefficiencies until now, marketers have been pricing it below their profit maximizing price, probably focused on market share.

So why will the prices go up with profit despite drop in revenues? With recession, as some customers shift to private labels those who are left and prefer these brands have a higher willingness to pay and are loyal to the brands despite the price. Until now the CPG companies were going after the wider market with lower price. Now they know that they can’t get the price sensitive segment and hence it makes no sense to leave their loyal customers with higher consumer surplus. Hence the increase in price.

But how can profit go up when revenues go down?  The price increase is pure profit but when marketers lose sales volume the loss in revenue is not all profit. As long as the marginal profit from increase in price  is more than the loss of profit from lost sales, the marketer will gain from the price increase despite loss in revenue.

So the strong brands are increasing prices not decreasing and they are reporting increasing profits despite drop in revenues for some. If you are a investor are you worried about drop in revenues or happy to get increase in profit?