In a down economy how do you keep price sensitive customers from switching away from your brand without losing price premium? The answer is anything but groundbreaking, multi-version pricing. Offer products at multiple price ranges so you can move customers within your brand family. Price sensitive customers will self-select themselves and buy lower priced products while you keep the price premium of your top of the line products. Nestle, the CPG leader, clearly stated and follows this rule
And you see how we through the brands are allowing the consumer to have different price points. These are all Purina products. You see it in dog food; you see it in cat food how we have spread over different price points the product portfolio and yet using the Purina brands there rightfully. Even small businesses like salons practice effective multi-version pricing.
Now the luxury segment, which have just one price, is gearing up for multi-version pricing. As the book Richistan noted, “pricing for this segment was like pushing an open door – no resistance”. Not anymore. The downturn is starting to impact the rich, who are becoming price sensitive in their own level (which is quite different from price sensitivity of a supermarket shopper switching to private label). Financial Time’s segment on Business of Luxury profiled how the down economy is hurting the price insensitive luxury segment. What do analysts recommend?
most analysts say companies with products spanning price points are more protected than those, like the French silk and leatherware group, that are more tightly focused. A broader portfolio means manufacturers can cater to consumers trading down, and can provide muscle with third-party wholesalers and retailers.
From small businesses like salons to large corporations like Nestle, from canned goods to luxruy goods the business principle is simple, “Keep the customers in your brand family by offering them products across a wide price range!”
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.
Ben and Jerrys (owned by Unilever) is not happy with a competitor’s ( most likely Haagen Dazs) redefinition of pint as 14 oz instead of the standard 16 oz. Haagen Dazs (brand owned by General Mills but Nestle produces and sells ice cream per their licensing agreement). Both Unilever and Nestle recently reported higher quarterly profit from price increases. Reducing package size is what Cadbury Plc described in their earnings statement as part of their, “price realization”.
Should Ben and Jerry’s take a strong position on this?
Update: I learned today from a boom about Cadbury’s that Nestlé sells 1 billion products worldwide. That is at least one billion prices. That is mind boggling. But the number sounds suspect to me considering their total revenue. Can someone fact check?
In the Nestle 2009 roadshow presentation (PDF) there are three slides that read like a lesson on multi-version pricing. One of the slides is shown in this post (advance thanks to Nestle). The numbers are not exact currency numbers but rather a price index showing relative price position. Nestle says in the transcript of the presentation,
You see here an example of PetCare which has shown and proven also to be a very strong resilient and defensive sector in bad times. And you see how we through the brands are allowing the consumer to have different price points. These are all Purina products. You see it in dog food; you see it in cat food how we have spread over different price points the product portfolio and yet using the Purina brands there rightfully.
Nestle is one of the few companies to report profits this quarter. As I wrote in my previous post, one reason is their price increase. Nestle’s multi-price point strategy seems almost so simple and easy that it will not be a surprise if anyone reading this raised the following questions:
If it is this simple why not everyone do just this?
If this works for Nestle why would it disclose this secret to the rest of the world?
If this is so effective why not have more products at different price points, in fact take it to the extreme and have one price per person?
The answer to the first two question is the the same,
This works for Nestle only because of the brand equity and the strong brand loyalty of its customers. Neither of these can be build overnight.
Pricing and multi version products are aligned perfectly with the core strategy. In the case of Nestle its competitive advantage comes from a tight integration of its R&D, product innovations, comprehensive geographic presence and from its people, culture and values.
Multi-price point may seem easy to copy but without getting every strategic component right simply copying it is not going to help a competitor.
So why not take multi-price point to the extreme? This requires much longer discussion and I will write on it in a later post. But if you have your thoughts on this please share.