The Pricing Inflection Point: Why Protecting Your Margins Is Key

By: Kevin Kirby
Date: July 12, 2022
Category: Wise Athena

For the past two years, consumers have spent more of their time at home. While remote work and quarantine have changed our lives, this shift has translated into consumers’ buying habits, too. 

In fact, personal consumption expenditures (PCE) for furnishings and household equipment increased by 2.3% in 2020.

Initially, consumers were focused on growing their savings. Multiple government stimulus packages helped consumers to boost their nest eggs, too. When prices initially rose at the beginning of 2021, many consumers still felt okay about the economy. 

But everything changed in May of 2022 when inflation hit 8.6% — the highest it’s been since 1981. This led to a dramatic change in consumer behavior. Shoppers are not only more price-sensitive when they do spend money, but they’re even changing where they shop.

The net outcome is that brand loyalty is being tested in a big way. 

The rise of private-label goods in a high-inflation market

Consumers are shifting away from name brands to save money, which means private label products are having a big moment. In fact, shoppers will only return to name-brand goods if their private label favorites happen to be out of stock.

It’s a shift that’s already quantified in the market, too: 

  • In Q1 2022, sales of store-owned brands rose 6.5%, compared with a 5.2% increase in national brand sales, per data from IRI.
  • Nearly 80% of US adults reported either purchasing or being willing to purchase private label apparel, pantry, personal care, and other goods, per a Private Label Flash Survey conducted by Bizrate Insights in January 2022.
  • 30% of US adults switched to private-label pantry items in January of 2022, according to eMarketer.

Conversely, we’re seeing the price gap close between conventional and organic products. Since the healthier option is either the same price or close in price, shoppers think, “If I’m going to pay a few cents more, shouldn’t I get the nicer option?” This encouraged some consumers to opt for organic products when they previously only bought conventional. 

Why margins matter in 2022

This topsy-turvy environment means brands have a prime opportunity to introduce themselves to a new audience — but it’s important to tread lightly. If you focus too much on short-term gains or compete on price cuts, you could lose out in the long term. 

Looking at the long-term game, the path to success lies in your margins. 

Typically, you would calculate your margins using a backward exercise: 

  • You take the full retail price that you feel you could competitively support
  • Subtract retailer and distributor margins

… and that would tell you your margins. In the past, retailers figured that it was enough to just cover their fixed costs. They focused on simply moving a greater volume of products to boost revenue. 

But in today’s environment, this approach is outdated and ineffective. 

It’s time to take the opposite approach. Instead of getting fixated on a consumer price point first, you should start by analyzing your fixed costs: you can build in the right gross margin here from the start. This allows you to have the right marketing budget so you can do well in the new normal, too.

This is especially true in the natural and organic goods space. A premium product sold at a discount is going to yield a bigger response than a product that’s sold consistently at a price that reflects your competitors’. 

Don’t let your competitors dictate your pricing strategies. Depending on your product and industry, you should shoot for a target gross margin that best fits your brand. 

For food and beverage, 40% margins are ideal. If you’re at 30%, you’re probably still in good shape, but if you fall below 30%, you should consider immediate pricing action. For personal care, 50% margins are ideal and 60% is ideal for nutritional supplements. 

Calculate your ideal margins with Wise Athena

But how do you actually achieve these margins? Especially if you sell thousands of different SKUs?

If you’re looking to increase your margins and protect your volumes, AI and machine learning can help you get there. With Wise Athena, you can get smarter views into potential outcomes before you make pricing decisions. 

Our software platform helps CPG companies make informed pricing and trade decisions. Our AI and machine learning platform constantly updates data so you get a dynamic view as conditions change. 

This helps you: 

  • Be agile: AI and machine learning help you react faster. Instead of reviewing pricing biannually or annually, you can easily conduct review cycles quarterly. This empowers CPG brands to stay ahead of inflation — yes, even in this market.
  • Create opportunities: What products have the potential to drive more sales? Increase your velocity, spot vulnerabilities, and act on opportunities as soon as they arise with Wise Athena.
  • Improve accuracy: Project your 12-month sales volumes with up to 90% accuracy. See how changing prices, promotion strategies, and competitor actions can affect your performance.

Wise Athena’s predictive modeling is the closest thing to owning a crystal ball. Request a demo now to see how Wise Athena can help you overcome the headaches of pricing and inflation.

Written By Kevin Kirby

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