Value does not equal price

In most European countries, consumer attention is growing on the economic fallout from Covid-19. Tracking shows that they do remain concerned about the health aspects (in particular about how businesses intend to re-open safely) but the inevitable worries about job security have moved to the fore.
Les Binet (a marketing effectiveness guru at Adam&Eve DDB) has produced an excellent series of short videos about how marketers should navigate the C-19 crisis. In those, he highlights that we cannot entirely treat this economic chapter like a normal recession, because normal recessions have been driven by depressed demand, whereas with lockdowns, it’s supply that has been constrained.
Notwithstanding, there is likely to be some dampening of demand. Even as the supply side begins to recover, we’re already starting to see job losses, although the extent and permanence of unemployment will depend on the shape of the recovery and is therefore unknown right now.
It is highly probable that a chunk of consumers will be watching the pennies much more over the coming months.
According to ongoing research by Sparkler/PA Consulting (see graphic) currently 38% of UK consumers feel less able to spend than before the pandemic. And within that group, two thirds are currently unwilling to venture into normal consumption behaviour due to concerns about the virus, whereas the other third would do so if they felt better off.
Credit: Sparkler / PA Consulting
Faced with this type of sentiment, consumer packaged goods (CPG) marketers can expect prices to be under pressure for the foreseeable future.
However, whilst offering value will be a feature, this does not necessarily equate to dropping prices and squeezing margins. There is a very important distinction between value and price. In training sessions, I refer to a simple equation: Value = Benefits ÷ Price. That means value is a function of how much the consumer sees you offering to them, set against the price you’re charging.
The distinction is really helpful because it helps to show marketers that there are many more ways of offering value, without necessarily venturing down the ‘one-way street’ of simple price cuts.
Here are some of the tools with which brands can offer consumers more value, together with some examples.

Play the pricing piano

Many brands self-define as “premium” and/or say we don’t play in value. But, it’s important to balance the (often overstated) risk to brand equity of playing at multiple price points, with the volume foregone by not doing so.
Example – in my last newsletter I highlighted how, in frozen potato products, McCain has products that allow it to span price points from £1.99/kg to £7.00/kg effectively preventing competitors from getting a foothold in any one price tier.
Hit hot price points
A quick analysis of sales by price point for a category will often reveal that there are key price points at which most of the volume is sold. This indicates that it’s best to try hit “hot price points”. If you are priced under such a price, then you are likely leaving “money on the table” without getting much extra volume benefit from selling below others.
Example – this is a long-established principle in kids’ snacks, and sometimes called “pocket money pricing”, although it has wider application. Players like Kinder, Cadbury, Mars & Nestle all have a children’s product designed to be sold at less than 50p or £1.
In the case of Kinder Egg, a single unit retails at around 70p in grocery, but this still leaves room for independent retailers to make a decent profit selling at £1 or below in convenience channels.
Give more
One of the most cost-effective ways of delivering more value is with extra-free packs. These allow brands to grab attention with pack flashes and as an on-pack, the shopper is more likely to attribute generosity to the brand rather the retailer.
The costs of adding extra volume in a pack is normally low for the manufacturer (as long as supply chain is set up to manage it), whereas the value of what’s given is relatively much higher. Downsides include the complexity of shifting different SKUs through the supply chain – the regular one and the extra free pack.
Example – Dulux paint has used Extra Free and Special Value packs for many years. These packs work especially well on gondola ends in DIY stores and help the brand steer clear of price/litre comparisons where it cannot profitably compete with own label or tertiary brands.
Emphasis on quality
Enhancing the consumer’s perception of the ‘benefits’ part of the value equation provides more perceived value. Arguably this strategy is underused by marketers, who in many CPG categories, have failed to respond adequately to the progress made by private label brands in ‘owning’ quality as well as price.
Example – the ingredients story is central to lots of Haagen-Dazs communication. It’s a strategy that has been maintained over a long time. From ads of a decade or more ago, through to the current “Don’t hold back” campaign, the brands takes a position on ‘no compromise’ on recipe.

Affordable luxury

Also dubbed the “Lipstick Effect” this is the theory that when facing an economic crisis or the economy is in a recession, consumers will be more willing to buy luxury goods with lower price points. By emphasising luxury and making it accessible, brands can protect them selves or even benefit from tough times.
Following the 2008/9 recession, Euromonitor did an analysis of categories to identify those that enjoyed a sales boost. They concluded that the products that benefit are not always the same and it also varies by country. In 2009 lipstick sales rocketed in the UK but declined in the US. Other categories also gained – pet care, malt whiskey & mascara were among the highest growing.
Credit: Euromonitor
It seems the trick is to figure out which affordable luxury segments are already on trend and bet on those accelerating as a result of the recession.
Example – The growth of the hair colourants segment grew by 9% over 2008/9 in the UK. Already enjoying a renaissance, the trend for colouring hair accelerated during the global financial crisis.

Customisation

Individualising products and services helps both enhance the benefits perceived by the individual. Customisation is helpful to brand marketers because it makes direct price comparisons with competitors either invalid or – at the least – very opaque.
Nobody has really cracked doing customisation at scale within CPG. There are a few brands that are quite advanced, such as Graze whose business model is impressive, but they remain a tiny proportion of the snacking market. Other industries are more advanced in this area – e.g. subscription-based services, health and wellness.
Example – Care/of is a US service that curates and delivers personalised packs of vitamin & protein supplements based on a questionnaire completed by the consumer.

In conclusion

A recession should not automatically mean fighting harder on price, instead it’s a case of working smarter and using pricing tactics that deliver more to value-conscious consumers.

Incidentally, if you want to dive into pricing and associated psychology, check out my previous review of “Priced to influence, sell & satisfy” by Atul Dholakia.

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