Product Management & Pricing Strategy Development For FMCG Companies 🥫
While inflation is gradually becoming more manageable for businesses, it’s important to note that challenges persist. Particularly, the fast-moving consumer goods (FMCG) sector continues to grapple with various issues. These challenges include supply chain disruptions, rising production costs, and changing consumer preferences. Therefore, even as inflation shows signs of stabilisation, businesses, especially in the FMCG industry, must remain vigilant and adapt their product management and pricing development strategy accordingly to navigate the evolving landscape.
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The problem is though, concurrent challenges create a multifaceted environment, making swift and effective strategy adjustments a formidable task for FMCG companies. The intricate web of suppliers and distributors in their supply chains makes it challenging to quickly realign resources. Increasing production costs strain profit margins, often requiring careful cost management or price adjustments that can impact consumer demand. Additionally, keeping pace with rapidly changing consumer preferences demands continuous innovation and product development, which can be resource-intensive and time-consuming.
In this article, we will delve into the product management and pricing development strategy FMCG companies can employ to adeptly navigate changes in consumer behaviour and economic hurdles while ensuring profitability. Initially, we delve into the underlying reasons behind the difficulties confronting FMCG enterprises. Subsequently, we provide guidance based on observed effective practices adopted by businesses to craft valuable offerings and promote them successfully. We argue that businesses should prioritise innovation, product distinctiveness, and the establishment of robust brand identities.
At Taylor Wells, we believe that FMCG companies can effectively manage economic and financial challenges by making customer value and strategic planning central to their operations. By the end, you will have a clear understanding of how FMCG companies can achieve profitable growth.
FMCG Companies Need To Rethink Their Product Management And Pricing Strategy
Despite inflation starting to stabilise, FMCG companies continue to grapple with profitability challenges for several reasons.
1. Persistent Supply Chain Disruptions
FMCG companies are grappling with ongoing supply chain disruptions that have made it increasingly difficult to maintain profitability. These disruptions, often caused by factors like port closures, labour shortages, and transportation bottlenecks, lead to delays in receiving critical raw materials and components.
As a result, production schedules are disrupted, and companies may have to source materials at higher costs from alternative suppliers. For example, the COVID-19 pandemic initially led to shortages of key ingredients in the food and beverage industry, causing cost escalations and production delays. Such disruptions not only raise operational expenses but also hinder the ability to meet customer demands, impacting overall profitability.
2. Rising Production Costs
Escalating production costs represent another significant challenge for FMCG companies. Labour costs are increasing due to minimum wage hikes and higher demand for skilled workers. Moreover, energy prices, including electricity and fuel, have been on the rise. The surging costs of packaging materials, driven by factors like supply chain disruptions and increased demand, have further strained profit margins.
For instance, the price of aluminium, used extensively in beverage cans, has surged, directly affecting packaging expenses. These mounting production costs squeeze profitability, making it challenging to maintain competitive pricing and profitability.
3. Changing Consumer Preferences
Shifting consumer preferences, especially toward healthier and more sustainable products, have compelled FMCG companies to invest heavily in product innovation and marketing. Meeting these evolving demands often requires reformulating existing products, introducing new ones, or rebranding. Such efforts come with substantial costs.
For instance, companies need to invest in research and development to develop healthier product variants, and then market these changes effectively to consumers. This strategic shift entails additional expenses, impacting profitability as FMCG firms navigate changing market dynamics.
4. Intense Competition
The FMCG sector is characterised by intense competition, with numerous brands vying for market share. This competitive landscape exerts pressure on pricing strategies, limiting the ability of companies to pass on increased production costs to consumers.
Price wars, commonly observed in categories like detergents and personal care products, can further erode profit margins. FMCG companies must invest in marketing campaigns, promotions, and discounts to maintain or gain market share, which adds to operational expenses. In such a fiercely competitive environment, maintaining profitability becomes a daunting task.
5. Global Economic Uncertainty
FMCG companies often source raw materials and ingredients globally, which exposes them to currency fluctuations and economic uncertainty. Sudden shifts in exchange rates can significantly impact the cost of imported materials, affecting overall production costs.
For example, a weakening of the local currency against the U.S. dollar can increase the cost of importing essential ingredients for food products. These exchange rate fluctuations introduce an additional layer of complexity to cost management and profitability forecasting, requiring FMCG companies to implement effective risk mitigation strategies in an ever-changing economic landscape.
While inflation management is a key concern for FMCG companies, they also grapple with these multifaceted challenges, which collectively contribute to the ongoing struggles in maintaining profitability. These companies must employ adaptive strategies and cost-effective measures to thrive in this competitive and dynamic industry. We’ve seen certain effective approaches in product management and pricing strategy utilised by Modibodi and Marley Spoon that we believe can benefit other companies too.
Discussion On Product Management And Pricing Strategy Development Planning In FMCG
There are valuable insights to glean from industry leaders like Modibodi and Marley Spoon in the fast-moving consumer goods (FMCG) sector. These lessons can provide guidance to other companies grappling with current business challenges.
By examining the strategies and practices employed by these successful companies, organisations across various industries can gain valuable insights on how to navigate and overcome their own unique challenges and achieve sustained success.
Product Management And Pricing Strategy #1: Create differentiated product mix offers and pricing strategies based on what customers value.
In today’s FMCG market, consumers are shifting away from simply seeking cheaper products and instead prioritising value. For instance, they are willing to invest in FMCG items if convinced of their superior quality, alignment with their preferences, fulfilment of their unique needs, and a strong reputation for durability.
This change in consumer behaviour has substantial implications for FMCG businesses. To thrive, companies must focus on innovation, product differentiation, and building strong brand reputations. They need to exceed consumer expectations, emphasising the overall value proposition. Recognising and adapting to this shift is essential for FMCG companies to stay competitive in today’s market.
Marley Spoon, for example, offers a distinct good-better-best pricing and branding strategy to appeal to consumers with different spending profiles. They have found that their real competitor is not other online subscription meal providers but rather supermarkets.
To recapture customers who were choosing to buy cheap frozen ready meals from the supermarket, Marley Spoon completely redesigned their menu options and price structure. They also varied the meal options based on health variants such as gluten-free, vegetarian, and high-protein diets and made each option into a distinct brand.
These variant offers are not the cheapest in price. Customers could buy cheaper if they wanted, but Marley Spoon has found that customers are willing to pay more for convenience and healthier options. Their volumes and margins also have increased since these new meal options were introduced.
Implementing customer value-focused price increases when necessary involves a strategic approach.
Firstly, conduct thorough market research to understand your customers’ perceptions of value and their willingness to pay. Identify areas where your product or service excels and what unique benefits it offers compared to competitors.
Next, communicate the value-added aspects effectively to your customers. Highlight the improvements or additional features that justify the price increase. Consider phasing in the price adjustment gradually to minimise customer resistance.
Be transparent about the reasons behind the increase, emphasising how it directly enhances the customer experience. Monitor customer feedback and adjust your strategy as needed to ensure the perceived value aligns with the new pricing structure.
Product Management And Pricing Strategy #2: Cut costs by removing inefficiencies in the supply chain.
Yes, it may be time to review your supplier agreements. Are they aligned with your business strategy? Are there better suppliers you could be partnering with? Partners that align with your new price and brand positioning and who share your visions and strategies for growth.
In the FMCG industry, like many others, cost management is a paramount concern. Businesses must scrutinise every internal expense meticulously to uncover potential savings throughout their supply chain. This process involves examining costs associated with procurement, production, distribution, and even overhead expenses like office rentals and utilities.
Yet, it’s crucial to approach cost management as part of a well-thought-out strategy. Hasty and indiscriminate cuts can inadvertently harm a company’s ability to maintain operational efficiency and meet customer demands.
For instance, if an FMCG company rapidly reduces its inventory to cut storage costs, it may struggle to meet sudden spikes in demand, potentially leading to lost sales and customer dissatisfaction. Therefore, cost-saving measures should align with the company’s long-term goals and customer-focused strategies.
To strike the right balance, businesses should prioritise cost optimisation by identifying areas where expenses can be trimmed without compromising essential operations. For instance, optimising the supply chain by renegotiating contracts with suppliers or adopting more efficient manufacturing processes can yield substantial savings.
Additionally, investing in technology and automation can enhance productivity while reducing labour costs. A methodical and strategic approach to cost management ensures that businesses not only cut expenses but also enhance their overall competitiveness and sustainability in the FMCG sector.
Product Management And Pricing Strategy #3: Avoid excessive discounting to drive volume in unsuitable consumer segments.
We see discounts are still a popular lever to pull to generate volume during difficult times. However, attracting the wrong customer detracts from your brand. They are also fickle. Price-sensitive consumers will switch at the drop of a hat.
Spend your marketing dollars attracting the right customers to the right brand. Sometimes there is a trade-off between volume and margin. However, with the right price structure and the right marketing communication strategies and advertising you can balance both.
In the competitive realm of FMCG, businesses should exercise caution and avoid hastily adopting popular trends like immediate discounting. Instead, they should prioritise strategic planning. Rushing into aggressive discounting without a clear strategy can lead to short-term gains but often results in long-term profitability challenges.
For instance, slashing prices without considering the impact on profit margins may create an unsustainable situation, where sales volume increases but overall revenue declines, ultimately hurting the bottom line.
To navigate these challenges effectively, FMCG companies must remain vigilant and stay informed about economic factors that could influence their business. This includes monitoring fluctuations in commodity prices, currency exchange rates, and inflationary pressures.
For instance, a sudden spike in the price of key raw materials can significantly impact production costs and profitability. By staying attuned to these factors and integrating them into their strategic planning, FMCG companies can make informed decisions that ensure they remain financially resilient and adaptable in a dynamic market.
Implications Of A Customer-Centric Product Management And Pricing Strategy In FMCG
FMCG should maintain their strategic and value-oriented approach in their product management and pricing strategy. Not being able to create value for both consumers and the business can cause reduced customer loyalty and competitiveness, financial instability from mismanaged costs, and missed opportunities and economic vulnerability due to neglecting the long-term perspective.
Establishing clear pricing guidelines and policies is crucial. This involves defining the company’s pricing strategy, outlining acceptable discounting practices, and setting pricing authority levels for various roles within the organisation. It’s imperative to communicate these guidelines effectively throughout the company, ensuring that all employees understand and align with the pricing strategy.
Companies should invest in data analytics and technology but ensure they are supported by highly skilled individuals who can interpret and apply the insights effectively. These experts can provide valuable context to data-driven decisions, bridging the gap between data analysis and strategic implementation.
Additionally, companies should not solely rely on technology for pricing decisions. While advanced tools are indispensable, they should be seen as enablers rather than replacements for human expertise. A skilled team can navigate complexities, assess the nuances of different markets, and adapt pricing strategies as needed. Combining technology with human intelligence allows FMCG companies to make well-informed pricing decisions that consider both quantitative data and qualitative market understanding.
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.
Foster a culture of continuous improvement and cross-functional collaboration.
Encourage regular communication between sales, marketing, finance, and product development teams to align on pricing strategies and value propositions. Create a feedback loop that captures insights from both customers and employees to refine pricing approaches continually. By nurturing a collaborative culture focused on delivering value to customers, FMCG companies can strengthen their ability to implement and maintain strategic pricing practices successfully.
Our findings also show 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.
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Bottom Line
FMCG companies must create differentiated offers aligned with customer values, avoiding excessive discounting in unsuitable segments. Concurrently, they should focus on cost-cutting by removing inefficiencies in their supply chains and streamlining processes from procurement to distribution. This balanced product management and pricing strategy allows companies to maintain profitability and meet customer expectations effectively.
Successful implementation hinges on combining data-driven decision-making with the expertise of skilled individuals, cultivating an organisational culture that values both. By adhering to these principles, FMCG companies can establish themselves as industry leaders, ensuring long-term growth, customer satisfaction, and sustained profitability in a competitive market.
For a comprehensive view of maximising growth in your company, Download a complimentary whitepaper on How FMCG Can Generate Profitable Growth Faster.
Are you a business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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