Helen Gregory reports
In a climate where eight out of 10 new products fail, how much does price play a part in deciding their fate? Modern marketing tools can assess the value of a product to consumers, but, in the words of one consultant, pricing is still a ‘black art’.
You can work out material costs, study the competition and analyse margins, but the price you choose can be more about “putting a blindfold on and pinning the tail on the donkey,” according to one supplier, while another admits: “You see what you think you can get away with.”
Yet in an environment where two of the largest food retailers compete so hard on price, products that don’t make the grade can be dropped more quickly than ever before.
“It’s absolutely critical to get the price right: too low and you lose profit, too high and you can lose a complete product which you can never introduce again, or if it’s at a critical price point, you’re stuck with it at that level for six months,” asserts Richard Hull, UK retail and distribution leader for consumer products, retail and distribution at Cap Gemini. “Of the products that fail, the reasons are quite often that the price point was wrong. It can make or break a product.”
So how do you do it? Even at a mid-range price, products can end up in a limbo where they are too cheap for quality-conscious consumers and too expensive for bargain hunters. Consumers can, of course, help nail
down the right price and manufacturers frequently quiz them in focus groups.
Tetley’s commercial director Nigel Holland says: “From a commercial point of view, the price that consumers indicate is acceptable is fed into an internal assessment model taking into account production costs, retailer margins and other factors involved.”
However, shoppers can say one thing and do another. Other suppliers, such as Unilever Bestfoods, admit they’ll conduct extensive research to try and isolate the factors responsible if a product isn’t performing as it would expect.
On the other hand, if a product sells well, suppliers may be left uncertain if in fact they have got it exactly right.
Given a choice, it seems many suppliers would rather go in low. Research by McKinsey reveals that of all launches - including food - only 5% of prices were too high; 5% got it just right, and 90% had room to raise the price; some were grossly underpriced and others slightly too low.
However, an excessively low price can handicap long-term profitability; you might get quicker market penetration, but lower margins mean smaller profits.
Going in with a lower initial promotional price is a tactic that can work well where the line is in competition with an established brand, says Clipper Tea account manager Dean Carberry. “If the product is of high quality it will attract repeat purchase and loyalty through trial, so low pricing can be an effective strategy.”
However, he warns that if the product has a premium positioning, then the brand can be devalued in consumers’ eyes.
Even if lines are not launched with a promotion, once they are on shelf, it’s definitely easier to lower a price than to raise it. Nandos MD Phil Lynas says that if suppliers get it wrong in the early days, growing the price is very difficult: “It will take you several years to get from £1 to £1.20.”
Lizzie Vann, founder of the Organix brand, asserts: “We won’t try and manipulate price. It’s far more important to get the price right at the outset.”
Fabulous Bakin’ Boys MD Gary Frank admits: “In the early days when we did less research we launched a product that was too expensive and it didn’t sell so we had to drop the price.” However, coming up with a truly original product, particularly innovatively packaged, can help raise shoppers’ price expectations, as Frank discovered when it put its new grab packs of finger muffins in French fry-style packaging in front of consumer groups. Some reckoned they would pay up to £1.49 - which pleasantly surprised marketers.
Yet the cake company decided not to respond to tempting suggestions and plumped for a 99p price point. Frank adds: “Consumers have no point of reference with a genuinely different product - but you must sometimes take what they say with a pinch of salt.”
McKinsey principal Eric Roegner believes a catch-up product is easier to price as you can compare it to existing products, while a really revolutionary one is much harder and says: “While manufacturers wait for market acceptance, they can feel pressure to move volume and can bring prices down sooner than they needed to.”
Clipper Tea’s Carberry adds: “If you have a unique offering, then buyers are more likely to look at it and the cost of the product doesn’t come into the equation quite as much.”
With buyer interest on board, how much do retailers influence manufacturers’ pricing in this promotion-driven age?
Many manufacturers say they take account of retailers’ planned promotional spend, and there’s no point presenting stupidly low prices because retailers have to make their margins as well.
Safeway’s communications director Kevin Hawkins says it will give pricing advice to anyone who asks. However, he doesn’t believe price is a big factor in most products’ failure - quality has a lot more to do with it. “There isn’t an objective right price for anything - the market is driven by what consumers want and how much competition there is.”