Five Pricing Moves for CPG in a Cost-of-Living Crisis

The limited future potency of these short-term measures helps explain why over 70% of companies in our survey believe that they need to find additional levers to balance growth and profits.

In our experience with socioeconomic and macroeconomic crises during recent decades, we have seen many companies focus too heavily on shoring up immediate results and too little on building medium-term advantage to capture future growth. Yet companies that invest in developing medium-term advantage—in such forms as next-generation digital solutions, advanced analytics, and AI—produce total shareholder returns that are three times as high as those generated by companies that do not.

Through close analysis of the success of these digital and AI-supported efforts, we have developed five imperatives for CPG companies to act on as the current inflationary and income-constrained environment persists. Meeting these imperatives for net revenue management (NRM) will not only provide short-term relief, but also lay a foundation for ongoing competitive advantage.

Five NRM Imperatives for CPGs to Win Today and Tomorrow

To deal with ongoing inflationary and cost-of-living challenges, CPG companies should adopt NRM solutions that balance future perspectives with lessons from the past, cut across company silos, and link NRM with end-to-end efforts to reduce complexity. The solutions should also take customer and category views into account and not be solely inward looking.

Integrate future-facing consumer perspectives. In the past, the norm for forecasting and planning among CPG companies involved projecting a relatively stable past into a relatively predictable future. But the answers to today’s acute challenges lie outside historic price levels and household budgets—and therefore outside the range of the historical data. To understand how consumers would choose at price points and pack sizes not previously observed in the market, leading CPG companies are using AI methodologies to integrate granular analyses of historical data with future-oriented consumer research.

Combining historical and forward-looking data also enables CPG companies to implement differentiated price increases instead of uniform ones. They can introduce de-averaged price changes across brands and SKUs, depending on brand strength, elasticity curves, competitive positioning, and changes in input costs. We have observed that when companies take this holistic portfolio approach, the profit impact is at least twice as high as that of blanket, cost-driven price increases that have been the industry norm during the past 18 months.

Synchronize assortment, portfolio simplification, and value engineering efforts. Most CPG companies rarely address revenue management and cost/complexity management holistically. But in view of today’s challenges, it makes sense for both sides to work in concert with an end-to-end approach.

If companies persist in focusing narrowly on tried-and-true responses to inflation, income-constrained consumers will increasingly trade down to value brands or private labels, switch to discount channels, or stop buying altogether. At the same time, most CPG companies are trying to improve their margins by reducing costs and simplifying portfolios. The current crisis offers a unique opportunity to serve both objectives by reengineering leading SKUs to increase margins and enhance consumer value. By pursuing this approach, companies can reduce waste in their assortment by 30% or more and generate greater value for themselves and for consumers. The key is to address complexity at the recipe, formulation, and packaging levels for core SKUs, informed by consumers’ perceived value and willingness to pay and by recognition of the true drivers of complexity and cost in manufacturing and the supply chain.

Evaluate NRM levers holistically. CPG companies are taking two divergent directions in their strategic planning for 2023. Some companies are significantly reducing their promotional funding, while others are implementing ambitious price increases that they “deal back” through increased use of promotional price points.

Both strategies have merits. To choose the right one, companies need to understand customer behavior holistically with respect to packs, prices, and promotions, rather than looking at each in isolation. Some shoppers can bear modest price increase at the shelf paired with shallower, less frequent promotions; others can bear higher shelf prices supported by promotions that drive incremental volume.

No single pricing tool, promotion tool, or assortment tool will offer the right answer on its own. CPG companies need to integrate recommendations from their point solutions into a unified plan and then apply their own judgment or use platforms that can make tradeoffs and recommend actions across NRM levers.

Take the retailer’s perspective. Most retailers face just as many issues as their CPG counterparts do. To reset and forge new relationships, CPG companies should start by taking the retailer’s perspective. Most CPG companies underestimate how much incremental insight they can offer even their most advanced retail partners by optimizing outcomes for the mutual value pool instead of exclusively looking to their own self-interest. For example, a company’s promotion strategy will change if it considers how promotions affect overall sales at the category level, including cannibalization of store brands and competing brands and overall impact on retailer traffic, instead of focusing on uplifts for their own products in isolation. Because retailers face many of the same challenges as their CPG suppliers, they may be motivated to share more granular data at the SKU or point-of-sale level in support of these efforts.

Clean up inefficient legacy trade terms. When CPG suppliers and retailers have a shared category perspective, they can work together to identify legacy terms that no longer yield value to either party. Relationships between these parties encompass a web of terms and conditions, some of which lose their relevance in a period of volatility. Legacy terms designed to govern promotional funding or secondary placement in more stable times may have less impact and less relevance in a period of multiple price increases, reduced promotional activity, and major changes to assortments. This creates an opportunity to eliminate inefficient and unproductive terms and conditions.

How AI Can Support These Efforts

Customized AI approaches can accelerate a company’s efforts to follow each of the five imperatives discussed above. They can enhance decision making, improve the quality of forecasting, and enable faster responses to unexpected changes. Three advantages of augmenting NRM initiatives with AI deserve detailed coverage. The speed, sophistication, and scale of AI-based tools can boost EBITDA by over 300 basis points when CPG companies use these tools to improve aspects of pricing that have the greatest leverage within their organization.

Integrate rather than triangulate. Decisions on pack price or promotional strategy often require triangulation to resolve conflicting results from different inputs. For a particular product, analyzing historical data may yield one optimal answer and assessing consumer research may lead to another, with neither outcome fully satisfying the company’s original set of objectives. (See Exhibit 3.)