Comprehensive Analysis Of P&G’s Price Increase Strategy For Consumer Goods 🌀
Inflation and increased manufacturing costs of consumer goods have made it necessary for many businesses to reconsider their pricing strategies in order to remain profitable. Many consumer goods companies, like P&G, are now seeking to maximise their revenue by implementing a price increase strategy. Price hikes can be beneficial solutions to cost and demand-driven inflation when correctly implemented, as they allow businesses to make up the difference between actual costs and market prices while still providing customers with quality products.
The problem is though, even if people continue to purchase from you despite price increases, this does not necessarily mean that your pricing strategy is working in your favour. Without conducting adequate market research or analysis into consumer behaviour, it can be difficult to accurately gauge the effects of price increases on your sales and customer loyalty. If customers begin to feel that they are paying too much for your product, it could lead them to look for an alternate option in the market.
In this article, we are going to discuss a case study using recent price increases that Procter & Gamble (P&G) put into effect for its products.
We examine how their sales and revenues have been impacted by higher prices and what that means for their pricing strategy going forward. We argue that customers’ little resistance to price increases should not make businesses complacent. Otherwise, they are at risk of losing sales and revenues in the future.
At Taylor Wells, we believe that blanket price rises are still a risky price move for businesses. Managers should rather look into longer-term customer-focused strategies to drive increased sales and profitability. By the end, you’ll understand how to develop a long-term pricing strategy and how to apply price increases in less risky ways.
Advantages And Disadvantages Of Increasing Consumer Goods Prices For P&G Strategy
In response to recent market trends, we are seeing more large corporations implementing across-the-board price increases. For some companies, despite increasing their prices, consumers show little resistance. This could be due to the establishment of trust in the product or brand, so customers are willing to pay a higher price knowing they are getting an item of value.
Another possibility is that customer loyalty has been earned and customers remain loyal despite any price increases. Many companies price their products to reflect the value they provide, with customers understanding that higher prices often equate to higher quality and greater benefits. Therefore, even if prices are increased, loyal customers may not react negatively due to the trust they have established in the product or brand.
Procter & Gamble, for instance, recently increased average pricing across all of its categories by 10% while only seeing a 3% decline in overall volumes. Some analysts interpret this as a sign that the majority of consumers are not particularly resistant to price increases that have been made helping boost sales forecast and third-quarter margins.
P&G’s consumer goods pricing strategy is based on many components.
The price of Procter and Gamble products is primarily determined by the item’s quality and brand value. P&G employs three separate pricing strategies—competitive pricing, penetrating pricing, and premium pricing—to increase market share and generate income.
The company takes into account the current market conditions, the cost of production, their competitors’ prices, and the perceived quality of their products in order to determine a competitive price point. They also take into consideration consumer trends and preferences when setting prices for their products. P&G incorporates a market-based approach to pricing, which helps them maximise profits while staying competitive with their rivals.
In addition, P&G employs a segmented pricing strategy, where they offer different prices for different groups of consumers who have varying levels of demand for the product. This allows them to have more control over their pricing and increase their profitability. So far, P&G’s strategy seems effective. Should the company continuously rely on price increases to boost profits, though?
Discussion On P&G Strategy
Looking at the overall results from P&G’s recent pricing strategies, financially the situation looks good: For example, P&G’s gross margin rose by 150 basis points from a year ago, with a 470-basis point bump from the higher pricing. The question is though is this sustainable profit and can P&G keep pushing more price increases when inflation and increases rates are so high?
At Taylor Wells Advisory we believe that businesses should be mindful of consumers’ price responses during the next few weeks and months. In the supermarket industry, for example, we are seeing shoppers quickly shifting to less expensive private-label brands and new meat and protein alternatives in response to increasing food prices. We also note that even P&G, despite their success over the past year, is also experiencing notable and quick volume declines in the health and beauty category in Europe which can’t be ignored.
Andre Schulten, the chief financial officer of P&G, also acknowledged that the drop in sales volume is undoubtedly caused by pricing as consumers are being a little more cautious with their purchases. The largest division of P&G, fabric and home care, witnessed a 5% decline in sales volume as average prices increased by 13%.
This indicates that excessive, ill-timed or blanket price rises are increasingly becoming a risky price move for businesses. With short term gains from aggressive price increases often end up devaluing good brands and businesses leading to a YoY category sales decline.
Price increases can help businesses boost profits, but it shouldn’t be the only strategy.
Businesses should not rely solely on price increases to increase profits. Not only can this lead to an unsatisfactory customer experience, but it can also result in decreased sales and profit margins over time. Price increases may be effective in the short term. However, they are often unsustainable in the long run due to competition and market forces.
Alternative approaches to consider include price optimisation, micro-segmentation, and targeted promotional plans and loyalty programmes.
By examining and adjusting their pricing strategies, for example, consumer goods businesses would be in a better position to maximise profits without resorting to a blanket price rise. Companies can also evaluate their segmentation strategy – analysing emerging customer segments, creating differential pricing models; offering bundle products and services to increase the perceived value of items; and potentially offering targeted discounts and loyalty programs to make brands stickier.
Implications Of P&G Consumer Goods Global Price Increase Strategy
Businesses should rather consider other pricing strategies to drive increased sales and profitability. These include investing in building pricing and marketing capabilities, and product development or price optimisation. These will offer a more stable foundation (compared to relying solely on price increases) for reaching target consumers, stimulating demand, increasing market share, and ultimately growing revenues.
However, none of these strategic pricing strategies can be implemented without the support of a high performance pricing team. In fact, our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
A good pricing team alone cannot fix a flawed pricing system, though. Business operations still become unsustainable when organisational functions are fragmented and businesses are running pricing off legacy systems and knowledge. This is why you need to build organisational capability when you seek to drive a new commercial strategy. In fact, our findings shows that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
Huge companies, like P&G, can boost profits without implementing massive across-the-board price increase strategy by focusing on other aspects of business too. These may include operational efficiency and product differentiation.
Operational efficiency refers to the process of streamlining business processes in order to reduce wasted time or resources. By assessing current operation procedures and identifying ways to improve them, businesses can increase profits without incurring major additional expenses.
Product differentiation refers to the process of creating unique elements in a product offering that sets it apart from competitors. This may include changes to the product design, features, or services associated with it. By emphasising attributes that make a business stand out from its rivals, customers will be more likely to opt for one company over another. With some creative solutions and strategic planning, businesses can find new opportunities to drive up their revenues without taking drastic measures.
Business leaders of P&G must be aware of the risks that come with blanket price rises strategy. Such a move at this time is likely to result in unfavourable customer price responses such as customers switching to competitors and brands who offer better perceived value for money. Additionally, an across-the-board increase in prices may not necessarily result in profitable revenue.
Ultimately, consumer good businesses should always be open to feedback from customers regarding pricing changes. Then, strive to remain transparent about their pricing decisions. Ultimately, a well plan price rise strategy underpinned by an effective price architecture and promotional planning system will help FMCG companies to maximise profits and maintain a positive relationship with their customers and end consumers.
For a comprehensive view of maximising growth in your company, Download a complimentary whitepaper on Future Proof Your Pricing Strategy.
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