Inflation. Consumer goods companies are all victim to it, and in face of the margin squeeze, brands are battling it out for a share of the profit pool available. When it comes to overcoming it, manufacturers face two key mindset challenges. The first is around limited beliefs when it comes to internal capability to deliver change, and the second is around fear of customer dislocation. However, it’s key when driving the RGM agenda to remember that the customer is conditioned to expect inflationary pressure, its now down to you to think about the best ways to combat it.
So how can revenue growth management techniques be used to help mitigate the effects of inflation?
Here, we outline the following tactics:
- Base price increases
- Average realised price
- Value engineering
- Mitigation of COGs increase
Base price increases
Base price increases are the classic approach to mitigating the effects of inflation. There are a number of ways you can approach base price changes, ‘surgical’ being targeted and differentiated, based on specific packs or specific price points, ‘blanket’ covering a whole pricing portfolio.
Price elasticity analysis is useful to understand what the volume impact of your proposed changes is going to be. This will underpin your argument and prepare you for a value-based conversation that is much more likely to deliver results. Elasticity based pricing puts you in a much stronger position to have a fruitful conversation with your customers. There’s work required to do this, but through experience working with our clients we’ve seen extremely effective results, particularly for suppliers implementing a price increase independently of whats happening in their category. In today’s competitive environment, it adds weight to your argument and puts you in a much stronger position with customers.
When implementing a base price increase, consider whether you are just trying to recover inflation or if there are further opportunities for growth here.
Average realised price
Price realisation is the average selling price per unit of product. You can influence this through a programme of techniques to affect both buy-in (purchases made by the customer) and sell-out (purchases made by the end consumer). Techniques include:
Inflation-busting promotions – Promotions can be an effective way of driving volume, particularly when aligned to events in the calendar year or in conjunction with loyalty schemes. In light of inflation, today’s cost-conscious consumers seek value when visiting stores or online. However, remember to align to your category and brand strategy. If your brand aligns to an EDLP model, this could work well for you.
Hold price/promo-de-escalation – It may be that existing promotions you are running are simply not that effective or not necessary. In this case, hang on to your base price and try to maintain your margins through promo de-escalation.
Driving premium assortment and mix – If your portfolio includes premium brands and offerings, you have a bigger opportunity to deliver higher levels of margin. Take your most profitable packs and consider how you can drive sales in this area, for you and your customers.
Change retailer buying patterns – Work with your retailers and incentivise more efficient order patterns. Uncover where efficiencies lie, and have those collaborative conversations to discover where you can work together to deliver growth.
Implementing a programme of techniques to affect buy-in and sell-out is effective, but changes in the supply chain take time. Ensure you take into account the opportunity cost of operational constraints in your overall plan.
Value engineering
Value engineering is a planned approach to cost reduction through changing your product’s composition or design, thus preventing cost pressures.
Pack sizes – Brands here have generated efficiencies through selling smaller packs at the same price, or larger, economy-sized packs for a higher price.
Product reformulation – In order to cut costs and manage efficiencies, many consumer brands look to their manufacturing in order to reformulate. However, when reformulating, it’s a fine line to tread and you risk offending loyal consumers with an inferior or dissimilar product. Working with operations to ensure and acceptable alternative is extremely important to prevent putting off consumers.
Packaging reformulation – Often packaging is one of the most cost sensitive components of a product. Take a look at these in depth and consider which will give you the best return. Many brands here have even utilized sustainability credentials whilst cutting down packaging, a win-win scenario for all parties involved, and a great boost to brand value too.
Value engineering is often one of the most effective ways of generating efficiencies. However, consider that these simply aren’t short term fixes, with most taking effect after a 6-12 month lead time with a variety of operational constraints. Value engineering should be part of a multi-pronged strategy to impact inflation.
Mitigation of cost of goods increase
Reducing your cost of goods (COGs) sold directly impacts your bottom line. As revenue growth management, look to work with your procurement and finance teams to rationalize the supply chain. See which costs you can mitigate in any way you can, allocating them elsewhere to find a smoother approach. Here are some strategies available to you:
Buying in bulk – Buying goods in bulk can lead to quantity and shipping discounts. Work collaboratively and ask your suppliers how you could both benefit to gain a reduction in price.
Substitute where possible – Just like product reformulation, you can walk a fine line when it comes to replacing your trusted bulk supplies with ones at a lower price, and brands run this risk of losing loyal customers who are used to a certain quality standard. However, like-for-like products reducing overall costs can result in a win-win scenario for you and your customers.
Assess other suppliers – If you can compromise on aspects such as delivery time and packaging formats, see if you’d receive better rates buying from alternative suppliers. If this helps lower the cost, consider this as an important next step.
Many of the things you experience commercially with your customers will be handled by your procurement teams, so work with them collaboratively to deliver the best result. However, consider aspects such as budget relief, accounting standards and lead times before you jump to altering your cost of goods.
Consumer brands require a collaborative, long term strategy in order to combat inflation, and the following tactics in RGM are only just the beginning. Whether you start from the very bottom, looking at your COGs and product itself, or begin with the price sold to the customer, take into account the mindset changes that need to be implemented, too. Elements that determine success will be around business mindset and forward planning – many of your commercial team members may not have done this before. Ensure you consider how revenue growth management can fit best into your overall inflation-tackling plan.
Continue to build your revenue management capability. Find more resources for revenue management teams here with more articles, webinar replays and upcoming events.
