The Psychology of Pricing

SUMMARY

THE PSYCHOLOGY OF PRICING:
RESHAPING YOUR ELASTICITY CURVE

By Ray Florio, Partner, Growth Consulting, IRI

During 2018, nine of the 10 largest CPG manufacturers announced price increases, citing cost inflation and margin pressures as the reason. By mid-2019, some industry estimates indicate that approximately 70% of CPGs will raise their list price. While this may seem like good news for manufacturers, many of whom have had to focus heavily on cost reduction over the past five years, research shows that most products experience significant volume loss if the entire category isn’t also raising prices. Price increases alone are incapable of fully offsetting companies’ margin losses due to underlying spikes in material and other costs.

This report shares some common myths and improved strategies around price elasticity, and its importance in shaping the product and brand.

Highlights:

• Pricing elasticities are only a start for sophisticated pricing, not the end. CPG manufacturers should determine what price is right due to financial, branding, positioning and competitive considerations, then see if the pricing change is feasible under the current elasticity and the potential trade-offs involved.
• Manufacturers can keep their efforts to influence elasticity more focused by starting with Attribute Priming – focusing on the top features and benefits shoppers are willing to pay for, both in product design and marketing.
• IRI recommends a three-phased approach for any manufacturer seeking to change its product elasticity, with or without changing the underlying product itself: 1) Baselining – Measure the impact existing features and benefits have on your brand’s elasticity and competitor elasticity; 2) Conceptualizing – Test market and/or introduce new product concepts that refine positioning to focus on the features and benefits that are most likely to reduce elasticity; and 3) Activating – Share the new messaging and changes with retailers, priming them for seeing results and an upcoming price change once there is evidence of success.
• When working with retailers, start with today’s elasticity coefficients, and then dissect the underlying drivers of that number. Ensure the retailer understands which elements of the product, pack or positioning are most influential in driving elasticity or inelasticity, and pinpoint where improvements are possible, as well as the impact the resulting tactics will have.

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