Global recession, smarter consumers and a shift in the retailer-manufacturer relationship have made effective pricing strategies and execution more important than ever before.

“To say that consumers will return to historic norms is disingenuous” — this was the recent assessment of William Johnson, Chairman, President and CEO of Heinz, and a view that is almost unanimously shared across the consumer products sector.

Savvy, price conscious consumers represent a new generation of purchasing power

Consumers have undoubtedly reset their perceptions of value and price as a result of the global recession. Not only are most consumers now more sensitive to price, having adopted a deal-seeker mentality, but they are now far more savvy.

They are comfortable with mixing value and premium purchases, knowing when to buy private-label brands, when to stick with their trusted mainstream brands or when to trade up and treat themselves.

In short, manufacturers are having to work far harder to convince consumers to buy their products.

Even so, a clear understanding of a brand’s price-value positioning in the marketplace represents a key leverage opportunity for manufacturers.

A new era of competitive and responsible retailers emerge

In tandem with this shift in consumer behavior, retailers have also moved to exert greater influence over branded manufacturers.

In Europe, some retailers are negotiating harder and often on an international basis. A large supermarket chain, for instance, is demanding one price for brands across several countries.

Retailers are also rationalizing product ranges to reduce complexity, simplify the shopping experience and free up shelf space for their own private-label ranges.

And the competition from highly credible private-label brands has intensified significantly over the course of the recession.

In highly developed private label markets, penetration is already high (United Kingdom, 39%; Germany, 34%) and far higher in highly commoditized categories. In the United States, private label penetration has now reached 20%, significantly higher than before the recession.

Question: So how can manufacturers respond to these pressures through their pricing strategies, at a time when incremental price increases are no longer a viable route to drive top-line growth?

Answer:

Addressing the issue that pricing is “equal to value”. Having an intimate understanding of a brand’s value proposition, both from a qualitative and quantitative perspective, is key to setting the appropriate price point. In spite of the current climate, gaining this brand clarity could result in price points being moved up as well as down.

Developeing a rigorous analytical understanding of how consumer prices drive volume — be it absolute price, relative price versus the competition, or identifying a brand’s price threshold.

Understanding the pricing waterfall to identify areas of excessive spend, which then can be either reinvested in the business or dropped to the bottom line. These amounts typically can be between 1% and 5% of net revenue.

Getting smarter with trade marketing by focusing relentlessly on the ROI associated with this spend.

Manufacturers need a crystal-clear understanding of promotional events by brand, size, event type, account and season. This means having the right systems, processes and evaluation techniques, scaled and sized appropriately to an organization’s resource and capabilities.

Building a revenue management function in the organization. This group would typically have a central strategic element along with an in-market component.

The central function would focus on driving common processes across business units, developing analytical tools to enable fact-based decision-making and implementing measurement criteria (KPIs) to evaluate progress and business impact, while the in-market group would focus on price and trade execution.

Finally, and crucially, manufacturers need to forge a strategic and highly collaborative relationship with retailers with a common purpose of optimizing category growth.