When inflation hits, your pricing strategy inevitably feels the pressure. On the one hand, raising product prices will protect margins. On the other, you can’t risk pricing yourself out of the market. When consumers feel this pressure, their spending habits are likely to change, especially in developing countries and high-inflation regions.
In Asia, the introduction of a sugar tax aimed at improving public health has added extra tension, affecting FMCG brands - from raw materials to the point of sale. For instance, in the Philippines, the sugar tax now mandates a tax of PHP10/ USD 20 cents per liter of sugar-sweetened beverages such as juices and soft drinks. The rate will increase by 4% each year, with other countries, including Thailand, Vietnam and Malaysia, phasing in a similar tax over the next five years.
So how do you set prices in different countries when market changes like inflation and regulatory developments hit?
Taking the guesswork out of your pricing strategy is the first step to protecting your revenue. How well you’ve adjusted your pricing strategy based on research and the coping mechanisms you choose can help influence what ends up in the consumer basket — and determine if your brand will thrive.
Here are some of the considerations we discuss with clients who face pricing dilemmas in high-inflation climates.
Remaining profitable when consumers’ pockets are shrinking
When prices go up, consumers must make tough decisions based on their reduced spending power. Will they switch brands, purchase smaller quantities or simply stop buying certain products altogether?
Having the right answers to these questions is essential to optimize your revenue strategy, and maintain brand equity when inflation is at play:
- How much can you raise your product prices to maximize revenue before you lose your customers?
- Will promotion help or hurt the brand? What type of promotions are most effective at minimum costs?
- Should we consider size reductions? How will consumers respond to these changes?
- What is the impact on your overall portfolio if you increase or decrease price?
As tempting as it may be to rely on guesswork, desk research or historical insights, we strongly recommend against that approach when confronted with rising inflation rates. At best, the historical insights you may have exist in isolation. At worst, they’re outdated and potentially harmful to your current pricing and revenue strategy.
Context is key to effective FMCG pricing during inflation
Competitive context is one area that typically gets neglected in very basic pricing research solutions, but decades of pricing strategy experience has shown us that context is key. The marketplace isn’t a vacuum.
Assessing how your product performs against its competitors, the channels you’re using and the conditions you’re facing are all crucial, particularly when you need to adjust your pricing to reflect market changes such as rising inflation rates.
Customized research solutions work best. Not all FMCG categories are the same and not all factors affecting price can be predicted. For example, macro-economic trends, the maturity of the market, the strength of new entrants, competition and promotions can all impact price increases. For these reasons, meaningful research shouldn’t follow a ‘cookie cutter’ approach.
We recommend research methods like conjoint analysis and virtual shelf simulations to offer agile, highly-tailored pricing and revenue management solutions. This approach to pricing research examines consumers’ wider decision-making processes and helps you reach the right strategic choices.
3 pitfalls to avoid to ensure inflation pricing success
Having conducted many pricing studies in developing countries across Asia, Europe and Latin America, we’ve identified three pitfalls you should avoid to ensure pricing success and maximize revenue generation.
1. Don’t overlook your customers’ preference and limitations
The consumer should arguably have the biggest influence on your pricing strategy. Take the example of developing markets in Asia, where income is generally low. Although it’s less cost-effective, many consumers here buy in small amounts since they have a limited daily budget.
As a result, companies that don’t offer small sizes or single-serving products often lose out to competitors who have adapted their portfolio to reflect this demand.
2. Don’t automatically run the same promotions in different countries
Brands should consider which of their products they promote most heavily in different regions. In Asia, a premium variant will have less uptake than a regular version, for example. In addition, consumers in this region are often sensitive to price changes, So, a reduction in product size is generally a better approach. The best promotion option is generally to tailor what can be applied to single servings (or the smallest available product size).
3. Don’t make pricing or portfolio changes without comprehensive research
Successful pricing strategies are a careful balance of multiple moving parts or ‘levers." Basic research — only looking at pricing elasticity, for example — will not give you the whole picture.
Without comprehensive pricing research, you could be blind to consumers’ lack of tolerance for proposed changes, as well as their perceptions of your brand and portfolio.
For example, increasing headspace (i.e. volume of air rather than the food product in a packet) is known to attract the ire of empowered consumer groups.
Pricing insights never tasted so sweet
The sugar tax currently contributing to rising inflation in parts of Asia is just one scenario in which market factors are causing pricing challenges for multinational brands operating today.
When embarking on any strategic pricing and/or portfolio research, it’s essential you examine numerous company levers, as well as internal and external influences. These considerations are especially relevant if your company is setting prices for different countries and diverse regions, as your brand’s value doesn’t always translate from one market to another.
For 40 years, SKIM has been helping consumer goods companies in developing and developed markets to optimize their pricing and portfolio strategy. We understand the consumer psyche, their “willingness to pay” and how decision-making changes especially as their environment changes — in this case when their spending power decreases.
Whether it’s helping you understand how consumers will react to pricing changes, new product introductions or size alterations, we’ll team up with you to best optimize your revenue strategy during inflationary times. We’ve already helped numerous brands throughout Asia, Europe and Latin America to do so.