CPGmatters: Kellogg Touts Collaboration to Optimize Shelf Prices
Through a special arrangement, what follows is an excerpt of a current article from the monthly e-zine, CPGmatters, presented here for discussion.
Retailers considering any new pricing approach ought to first develop a clear strategic pricing plan with CPG suppliers before making dramatic changes.
High-low retailers often surrender profits unnecessarily when they convert highly promoted or merchandised categories to EDLP or hybrid pricing on their own. They change their pricing strategy in the mistaken belief they can turn promotional volume into strong base sales and grow from there -- even in categories where promotions produce 50 percent or more of sales.
"Our research shows that EDLP might increase unit volume, but in almost every situation we studied we saw category dollar sales decline," said Michael Greene, vice president-customer marketing of morning foods sales at Kellogg, in an interview with CPGmatters. "When retailers decide they want to approach a highly promoted or merchandised category in a new way, they first need to realize that shoppers have been trained. They expect to see promotions in cereals, for instance, and these incentivize people to stock up, buy more and consume more."
He and Amjad Malik, senior director-business analytics and CRM at Kellogg, presented to a packed room at the recent Food Marketing Institute Conference on the topic, "Optimizing Shelf Prices for a Highly Merchandised Category."
That's not to say EDLP wrecks category performance. According to Mr. Greene, retailers don't get strategic pricing input often enough from trading partners, either because they don't ask ("They believe their shoppers want lower prices, so they simply proceed.") or CPG fails to share a clear step-by-step approach which retailers could adopt.
To accurately project the impact of price changes within a category, Mr. Greene says it takes a deep understanding of the roles of specific brands and items within the shelf set. It also takes knowing the effect price changes would have on these brands and items (base-price elasticity), and the effect price changes would have on related items within the set (cross-price elasticity).
"With our proprietary pricing methodology, Kellogg can help chains that want to get more aggressive on price, ask the right questions, choose the right approach for their objectives and their shoppers, and make effective fact-based decisions," explained Greene. "Retailers don't have to discount as deeply as they think they do. They can price within 4 percent to 5 percent of a competitor and be considered even. At a 5 percent to 8 percent difference, consumers start to notice, but still don't change their buying patterns. Above 10 percent may be the tipping point for people to buy elsewhere."
The Kellogg approach begins with the notion that every SKU in every store is different. Opening questions include: What is your price gap to the competition? Who do you compare yourself to? What is the role of the brand/item in the category? (If a traffic driver, price closer to the competition; if a cash generator, can price further away.)
Equally important, says Greene, is for retailers to communicate any price drops they take, so shoppers are aware, can respond by buying more units, and give the store the credit due for making such a move. "If people didn't buy more products, are you accomplishing your goals?" he posed.
Discussion Questions: What's the best way to change a highly promotional category to more of EDLP one? What factors should be considered when making the pricing change? Do you see a need for a more collaborative approach with CPG vendors around pricing changes?