With volumes under pressure and costs rising, how do manufacturers keep margins under control?
To keep margins under control, manufacturers require accurate insight into sales volumes at different prices and up-to-date cost items and expenses, which is not easy. Volumes are under pressure from rapidly rising inflation that will continue for some time. Constantly changing corona measures also significantly impact consumer confidence and product demand; this calls for good forecasting and planning. Further to this, manufacturers must also deal with rising transport, production, and labor costs. Raw materials, such as sugar and wheat, have become significantly more expensive in the past year and spending has been cut back sharply in the course of the two-year crisis.
Further cuts in marketing and other expenditures will only put additional pressure on volumes and make price increases unavoidable. In any case, a price increase will have to cover costs. The scope for price increases depends on various factors such as brand strength, retail power, and competitive field (more on this later). As a result, there is pressure to continuously provide the business with an accurate picture of costs so that different scenarios can be drawn up to adjust prices in good time for margins to be kept under control. As competitors are in a similar situation and will follow comparable analysis steps, a quick price increase can give you a head start and a better financial position.
Smart companies, therefore, create scenarios of the impact of an increase in various cost items on margins at different price levels and consider different competitive reactions.
Consumers don't only look at absolute prices when they see price increases, they also compare prices at the point of purchase, which makes it essential to look at (cross) price elasticities per item (group). Not all products produce the same outcomes when it comes to price increases. What makes it complex is that the (cross) price elasticity is influenced by many external factors such as inflation and consumer confidence that are not controllable, as well as the target group and brand strength that are more manageable --factors that change rapidly and require continuous monitoring. Ultimately, the pricing analysis will be translated into a competitive pricing strategy, positioning, and (the continuous adjustment of) perception depending on the article’s role in the category. An intelligent pricing strategy provides a well-founded story to convince trade and retail partners to implement the relevant price increases.
These are many details that make it complex to calculate all aspects of creating an intelligent pricing strategy and maintain an overview. A time-consuming task for which many organizations don’t (or can't) reserve enough time and which is very error-sensitive if performed manually. Savvy marketers use software that can make better price predictions with algorithms, connecting multiple available data sources to gain insights efficiently, which is essential. For example, All About Food uses price elasticity insights to create scenarios of different price increases enabling them to set up annual negotiations with retailers to enforce price increases successfully.
Factors affecting price elasticity
Understanding the price sensitivity of categories is the starting point of managing a portfolio margin. A price increase affects people differently. For people with modest incomes, such as retirees, students, and those earning minimum wage or on benefits, a price increase has a more significant impact. Manufacturers with brands that focus more on these consumer groups can expect a higher price elasticity for products. A price increase for value brands will be difficult. However, other factors also play a role for consumers with a tight budget: 'brand value', 'involvement', 'number of competitors in a category', 'trendiness', 'planned vs. impulse purchases', 'time available for shopping', etc.
A good information system, therefore, has other sources available in addition to sales to provide deeper insights quickly.Our ScanmarQED Pricing Study
Now, more than ever before, businesses need to have an accurate picture of business costs and consumer demand. Our ScanmarQED pricing study can test retailer price scenarios to help businesses stay in control of their margins. Our expertise here at ScanmarQED enables organizations to manage a central database where production planning and costs, marketing expenses and activities, and consumer sales (possibly from different sources) come together. Business owners can make decisions effectively and with control.
"The pricing study gave me the confidence to make the decision to increase the price, and discuss it with the retailer using actual data".
Sales Director, All About Food