Using Penetration Pricing to Maximise Market Share 🏆
Can penetration pricing lead to increased market share? Will it gain more entry to the household segment?
In every brand categories in most countries, leading brands have one thing in common, which is being the lead in household penetration. So how come few companies are able to use pricing to boost penetration?
To find a solution, we need to find the problem. Pricing has long been one of the most perplexing challenges for consumer goods companies.
Problems with collapsing ROIs, volatile commodity prices ballooning gross margins, aggressive customer negotiations and sticky retail price points have been the constant thorn for most companies.
It just shows to prove that household penetration is an important factor for growing brands. As a result, more pricing leaders are taking a serious look at their pricing strategies. They know pricing can be used to increase penetration (defined as the percentage of households in a market buying a particular brand in a given year). The problem is, they don’t know the best approach—or even how to begin.
In this article, we’ll show how pricing can increase household penetration.
We’ll explore how businesses use pricing penetration to optimise brand awareness.
It is our belief that pricing deserves a home, one with a dedicated pricing team with an exceptional pricing manager.
When executives analyse their company internally, they often find it to be working against itself. Like many companies, the key players involved in price decisions don’t have a consensus on the pricing’s role.
- Finance wants to increase prices to optimise top-line growth or profits. This in order to cover costs and stay ahead of inflation.
- Sales want to increase market share through discounting to retailers.
- Marketing wants to rely on prices to build brand loyalty, tap into new occasions or fuel marketing investment.
With almost zero alignments on the ultimate pricing objective, it’s little wonder so few executives are satisfied with their pricing efforts.
While many companies struggle with pricing, some are getting it right. They are systematically relying on price as a tool to increase household penetration and growth.
So what are they doing differently? Research shows how winners rely on pricing to extend household reach, not narrow it.
With that, they took a unified approach to penetration pricing:
- Marketing aims to always attract new households, not just those who seem loyal today.
- Sales aim to optimise household reach across all channel customers, not within a particular channel.
- Finance works to increase the total profit margin to reinvest in reach marketing.
Although the pricing strategy may differ across brand portfolios and companies, successful companies analyses penetration pricing across these four dimensions:
Pricing strategy: Should I go up or down?
The basic pricing strategy question is this: to maximise household penetration, should I take my average portfolio or brand price up or down?
Microeconomic theory tends to dictate that the only way to increase brand awareness is to lower prices. Yet, pricing up is almost always better than pricing down at the end of the day. Optimising brand awareness requires innovation and marketing. In effect, you need to price higher to fuel investment in both. Competitors will have a much harder time following world-class innovation and marketing than they do lowering prices. Profits in premium categories are twice than those of returns in discount categories.
Consider a leading global cosmetics company. For years, the company held its premium prices steady, fearing the price premium (three to four times higher than mass products) was simply too high to attract new consumers. But after rigorous market analysis, it determined that flat prices were unlikely to attract new households in most markets.
Mass consumers were willing to trade up only if they found a product that was dramatically better for them. So, increases in household penetration would come only from breakthroughs in innovation, the in-store experience and heavy advertising. By raising prices, the company was able to dramatically boost its investments in these true contributors to household penetration. Moreover, its competitors quickly followed, limiting share erosion and expanding the pie for all players.
2. Pricing architecture: When a family pack limits growth
The basic pricing architecture question is this: what will improve incremental household penetration in my category?
In considering the strategic decision to move the brand prices up or down, consumer goods companies must know there are too many products competing within a price band. Also, there are crucial price bands or pack sizes that are underserved. Knowing this will allow them to design new offerings aimed at untapped households.
An example is if you keep making innovations that churn without expanding your business; you might not really understand incremental consumption at a household level. Find what’s most likely to unlock incremental households, and then design a pricing architecture to support it. It can unleash considerable growth.
Customer and trade execution: Working with retailers on penetration pricing
The trick to getting the pricing right is to ask the question is: how should we change retail prices and the broader retail environment to attract new households?
More often than not, sales teams concentrate more on winning more market share than on winning new households. While there is a link between the two, a shared focus can lead the companies in the wrong direction.
Even with brand loyalty, it is almost impossible to achieve in most categories. Shoppers will more often than not still line up in the aisle to choose which competing brands to buy. As a result, most companies make the mistake of instinctively turning to temporary pricing.
In the case of Temporary Price Reductions (TPRs), or in other words, on-shelf discounts that do almost nothing to attract consumers, its rates often consume more than 50% of a trade budget and do little to truly move the needle.
Often, they are embedded in the sales culture and important to in-year financial results.
So, how do you go about revising the pricing strategies to support the goal of maximising household penetration? The answer involves three tactics:
- Winning companies build a good category management program for both internal and external consumption that does two things: first, it avoids mistakes such as the pantry loading that occurs through buy-one, get-one-free promotions. Second, it attracts new households.
- Winners identify the whole customer experience within and across the customer base to increase awareness of their products and designing strong pay-for-performance programs to capture it.
- Winners use select price increases to fuel the investment required for both of the above.
Capabilities: Organising for continual improvement on penetration pricing
Most consumer goods executives complain that pricing changes simply isn’t in line with their organisation.
The reason? It’s one of the few tools used to meet short-term goals. Also, creating solid capabilities requires time and patience. Aside from that, it takes a tremendous effort to attract, train and retain the right talent. In which case, companies need to create a repeatable model to maintain momentum on pricing changes. Companies can see long-lasting results once they break the organisational barriers holding them back. You will need three strategies to achieve them.
Here are three strategies:
Particularly in sales, the best companies revise incentives to reward activities that increase long-term household penetration instead of short-term sales.
That means rewarding better distribution for core SKUs (versus in-and-out new products), consistent feature and display activity, and minimizing TPR activity. Winners establish a closed feedback loop designed to ensure that pricing decisions ultimately deliver on penetration strategy.
Build a business system that delivers your pricing and penetration strategy.
Many companies have business systems (everything from overhead investments to supply chains to IT) that are simply not equipped to provide what is needed. This is either because what is needed is not specified or because it changes every year.
Give pricing a home
Everyone has a stake in pricing, but there’s rarely any collaboration among Marketing, Sales and Finance. That leads to poor decisions.
Pricing deserves a true home: one with a dedicated, cross-functional decision-making pricing team supported by an A-grade pricing manager. In effect, the best companies form a single pricing team to take control of pricing and take charge of the necessary changes that will help them use pricing. This in order to increase household penetration.
When companies take the big step in creating such a team, they improve the science of pricing in the organisation.
Thus, a global pricing team solves the misdirection that hinders so many consumer goods companies. With Sales, Marketing and Finance working together toward the same goal, these companies are steadily expanding to household penetration.
With it, they gain market share from the power of pricing. While their competitors, who often view pricing and penetration as opposing forces, allowed pricing to fall between the cracks. As a result, they are now steadily losing ground.
Taking all of this into account, this is why you should approach the companies with a single question with big implications. Who’s the one executive in the company who owns pricing decisions?
It’s surprising how many companies can’t answer that.
Why penetration matters so much
Most consumer goods executives just don’t know at just how fundamentally important penetration pricing is to growth.
Brand plans include increasing a product’s buy rate by opening into a well-segmented group. Hence, getting them to become loyal shoppers to buy larger and larger quantities over time. Hence, across categories and countries, increasing penetration is the primary way to build big brands.
Research confirms that penetration is more important than the buy rate for growth. In almost every category examined globally, leaders tend to outperform on penetration, not buy rate.
We observe that loyalty across categories doesn’t vary significantly over time, but household penetration does. However, penetration is not a guaranteed success, and even top brands can experience churn rates of nearly 50%.
That’s why winning companies continually invest to acquire more new consumers every year than they lose.
Most companies rarely use household penetration in their pricing strategy. Possibly, this is because the key departments like finance, sales and marketing are not collaborating with each other.
Each key department views pricing differently according to their business goals. They should take a unified step to bring pricing to extend the household reach and not stifle it.
Household penetration is the most important factor for growing brands. Therefore, pricing can be used to increase penetration. The problem is pricing managers don’t know how to begin.
Most companies think that the only way to increase brand awareness is lowering prices. But pricing up can create world-class innovation and marketing. Profits in premium categories will double than those of returns in discount categories.
Despite the importance of increasing household penetration, it’s often not considered in pricing decisions. Basically, many companies viewed pricing and penetration as opposite forces that need to be carefully balanced.
Pricing managers know that these pricing and penetration forces work hand in hand. When done effectively, adding the household penetration strategy to pricing tactics increase top- and bottom-line returns.
Some businesses need the ability to deliver innovation, while others require packaging flexibility. Almost all of them need to have better insight into promotional spending. A clear growth and pricing strategy gives executives clarity on the right business system changes to make.