DISCUSSION
What’s creating the pricing disconnects between retailers and vendors?
Written by Warren Thayer
Photo: RetailWire
Through a special arrangement, presented here is for discussion is a recent article from Frozen & Refrigerated Buyer magazine.
Only 46 percent of retailers say they understand manufacturers’ pricing strategies. What’s more, they say they implement manufacturer pricing recommendations only about 30 percent of the time.
On the other side, 72 percent of manufacturers think retailers understand their pricing strategies just fine and figure their recommendations are executed by retailers about 70 percent of the time.
These vast disconnects — and their effect on sales and profits — are laid bare in Cadent Consulting Group’s 2016 Industry Pricing Study released last month.
Lots of manufacturers focus on closing price gaps versus competition, or elasticity-based calculations. But this approach falls short for retailers — they want pricing strategies based on consumer insights and innovation.
Indeed, retailers say consumer trends are the No. 1 consideration for manufacturers in setting persuasive pricing strategy. But manufacturers rank consumer trends at No. 13.
With retailers pushing for EDLP or promotion that doesn’t align with manufacturer objectives, a significant portion of trade spending goes into price reduction. For manufacturers, Cadent refers to this as the “Pricing Doom Loop,” whereby manufacturers become “highly reactive” to pricing. According to the study, “This can become very detrimental, particularly if manufacturers do not have a sense of what consumers are willing to pay for their products, or — said differently — protect the value drivers within their business.”
The study outlines how a manufacturer adjusted its product mix factoring in key benefits with high pricing power. With these value drivers identified, it evolved from a market driven portfolio of high-tier/low-tier, to a three- tier value-driven portfolio with premium-plus, premium and basic segments.
Cadent notes that its recent survey on trade spending revealed that about half of funding is used to lower prices to the consumer. But once value drivers have been established, they can be leveraged to drive promotion optimization. As the study says, “Marketers have often resorted to promotional reliance to build share, resulting in further pricing and value dilution on products where consumers are willing to pay more.”