Understanding and Optimizing Pricing and Promotions

Today’s shopper behavior is changing faster than ever before. Typically, shopper behavior changes are slow and steady – like making course corrections on a big ship. However, with the highest inflation in 40 years, we are seeing material changes in shopping habits on a much shorter timeline.

The Why Behind Price Increases

The average shopping basket that Acosta Group monitors has increased $60 in the past two years, from $281 to $382. This, combined with increased costs for gasoline, utilities, housing, insurance, and healthcare, is stretching consumer wallets to the point that we are seeing meaningful changes in behavior. Half of all shoppers are buying less groceries, eating what they have on hand, and sticking to food necessities. In our October 2022 Shopper Insights Report, we uncovered that shoppers are having “pantry nights” where they cook whatever interesting meal they can, versus going to the store to buy new ingredients. Nearly half of shoppers surveyed also said they are spending more time looking for deals and are switching to cheaper brands or private label to help stretch their income further.

While shoppers are looking for better deals, consumer packaged goods (CPG) companies are facing significant increases in transportation, labor, and commodity costs, which has led to never-before-seen levels of price increases across all categories in the store. With the Consumer Price Index (CPI) trailing the Producer Price index (PPI), CPGs and retailers are bearing the brunt of the record-breaking inflation even though shoppers feel that they are the ones suffering most. With manufacturers and retailers raising prices in the past two years to recoup some costs while shoppers are begging for deals and lower prices – how can we find the middle ground?

Takeaways for Retailers

Revenue Growth Management (RGM) can help, as pricing is a key RGM pillar. Historically, brands review price elasticities to understand where they have room to take pricing and where items are more sensitive to price changes. In the past two years there have been, on average, three to five price increases on most products. The changes happened fast, along with high increases in non-CPG items that are all competing for a shoppers’ share of wallet. Because of this we are seeing historic elasticities under forecasting volume impacts with the most recent price increases, so it’s harder to predict volume impact with pricing actions than it has been in the past. It is important for retailers to keep an eye on competitive pricing to see which categories and items are losing market share. Retailers have defined roles for each category across the store and should ensure they are priced competitively to win the trip from competition.

Another tool for retailers is to reach out to their brand partners to understand which have performed consumer research. The output of research can show where there may be room to increases prices, to realize better profitability, and where pricing may impact volume disproportionately. One of the most popular RGM capabilities is the Consumer Willingness to Pay survey, a best-in-class custom research method that leverages machine learning and artificial intelligence to ask consumers questions using a combination of price research techniques. Consumer responses are turned into optimal unit and revenue curves by price point which can then be used to understand the impact of price increases, or decreases, on forecasted units (see graphic below). It can help retailers with a more refined price strategy that doesn’t leave money on the table and identifies shopper psychological thresholds that could be detrimental to volume.

Another important way retailers can partner with brands is on testing different promotion strategies. With pricing at such high levels, promotions are more important than ever. Many categories and brands just recycle the same promotions over and over which have become less effective over time. Being open to trying new things such as using new price points, offers or tactics that resonate with shoppers, can lead to substantial growth. Consumer research on promo uplift across various tactics is a low-risk approach to providing data and insights.

Shoppers are stretched financially like never before, so making sure the shoppers’ voice is understood relative to pricing and promotions will ensure retailers maintain their market position and optimize growth opportunities. Paying close attention to market share across key categories will help retailers understand where they are winning and where they are at risk. Pricing and promotion strategies using data, insights, and input from shoppers can be optimized for the most effective path to growth.

Julie Oxner is the senior vice president, business intelligence at Acosta Group, a collective of the most trusted retail, marketing and foodservice agencies empowering brands and retailers to win in the modern marketplace.