Let's assume for a minute that we are in an environment where the economy is sluggish, customers are price sensitive, there is a lot of price comparison, how do you strategically price your product in that environment ? Do you lower your price, and commit what I call revenue suicide. Death by revenue, because we all know its easy to make a customer get used to lower price in such environment, and much harder to get them to the old higher price level when things get better.
But, what happens if you have to increase the price of your product in such an environment ? Maybe you have to do it for rising costs, currency exchange risks, annual planned revenue exercise, or just to meet your targets. There is a way to do it, and smarter companies have been using it to their advantage.
Case in point is Nestle India and Coca-Cola. Here is what they are doing to increase revenue and prices, without impacting its price perception.
Nestle markets an instant noodle product in India called 'Maggi', a highly successful 2 minute noodle product that is the staple or every student, bachelor, kids or even adults. With sales exceeding close to $500M and a 60% market share, a small increase in price can generate incredible profits. However, for as long as I can remember the price of the product has been anchored at 25 cents a package, and now with 5 young new in the market at the same 25 cents price it becomes increasingly difficult for Nestle to implement a price increase. This is where as a pricing manager, it becomes increasingly important to think about 'Strategic Profitability' and not just strategic pricing.
How do you increase the profitability while managing the price point. Knowing that customers are used to the 25 cents price point in the last few years and could potentially balk at a price increase. The smart people at Nestle started to shrink the packet size. The grammage of the packet went from 100 gm a couple of decades ago to a 70 gram packet now, while maintaining the look and feel of the product which can be seen below.
So keeping the price constant, while reducing your cost of good and thus strategically increasing the profitability. This not only gives you the same revenue, with little to no impact on customers. If compared to an old 100 gram pack at 25 cents, a 70 gram pack in 2016 at 25 cents is a whooping 40% price increase. How many brands and products can get away with a 40% price increase. This consistency in price is one of the factors that has catapulted it to one of the most recognized brand in India.
The core of coke's new pricing strategy comes with strategically pricing lower volume packages people now want at a higher price point. In the pricing world it can be articulated as the premium for a healthier drink. This is the same category in the entire coke line, that actually increased on volume year over year.
The anchor price or the price customers associate with a bottle or a pack of coke hasn't changed. The large 2L bottle sells for over $2, the 6 pack of 700 ml bottle sells for close to $3.50, whereas a 6 pack of 222ml cans sells for $2.47. So when a customer thought they saved a dollar by buying the 6 pack of 222ml, they really didn't. The $2 anchor price that customers want to pay or has in mind for coke hasn't varied much, but volume and profitability changed significantly.
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Pricing Manager specializing in creating pricing strategies using data analytics