A product portfolio can contain many items addressing a diverse collection of consumer needs. Some products perform well, others less so. Many times, markets have changed since a portfolio was put together and the strategy was outlined. And pricing changes have likely occurred in the category—perhaps driven by changes in the cost of goods.
Because markets are constantly changing, brands are re-evaluating constantly, adapting portfolio strategies to maintain financial goals and positioning. Portfolio adjustments can have short-term and long-term consequences, so addressing all options, along with the pros and cons to each, is necessary to finding the best option. Here are some common strategic pitfalls that brand managers can run into when trying to optimise a portfolio.
Mistake 1: Becoming over-reliant on trade promotion
Trade promotion is one of the largest drivers of volume in most fast-moving consumer goods (FMCG) categories. In moderation, trade can be incredibly useful. It can be quickly activated (especially temporary price reductions), and it often drives significant volume peaks. It is very visible, and because it is so close to the point of sale, it creates the feeling of a strong link between execution and sales. However, there are risks.
Consumers may adjust to a sustained promotion price and expect it to continue, causing some to revolt when prices return to 'normal.' Trade volume can be much less incremental than it appears at first. The promo product may see a strong lift in sales while being promoted, but it often comes by stealing volume from other products within the same portfolio. This can 'downtrade' consumers from higher-priced tiers and discourage them from returning. Another deceiving source of lift may come from consumers stocking up on sale items, driving a short-term bump that takes away from future volume.
Within the total cookie/cracker category, only 25 percent of promoted volume generates actual incremental volume. That is, 75 percent of the volume sold on deal would have sold regardless of the promotion, and the promotion only served to subsidise the purchase for the consumer. (Source: Nielsen)
Addiction to pricing promotions can train consumers not to purchase until the product is on deal. The promotion becomes the de facto price. While it’s difficult to predict the long-term effect of promotions using models, experience shows that it can bite brands down the road.
Mistake 2: Cutting off the incremental assortment tail
Removing poorly performing products from a portfolio makes room for new and innovative products on the shelf. However, the temptation is often to define performance by sales rate, and overlook how incremental the product is to the rest of the portfolio.
It’s usually a better strategy to delist the SKUs whose volume is most likely to flow back to the rest of the portfolio. For example, if you have two very similar products in your portfolio, then delisting one of them is likely to shift sales to the other one, the assumption being that both products fulfil the needs of the same consumers.
Most marketers are cognizant of the fact that adding a close-in line extension doesn’t gain a new audience; it largely cannibalises the base business. What many overlook, however, is that incrementality is equally at play when delisting. Delisting a close-in line extension would have most customers flowing back to the base business. On the other hand, discontinuing a small but incremental platform would be costly and may result in losing consumers to competitors or from the category entirely.
If the brand/category manager needed to decide which of these sub-lines to de-list, a kneejerk reaction would be to delist chocolate milk because it has the lowest sales rate. However, its incrementality needs to be considered before doing so.
Mistake 3: Ignoring price thresholds
A brand risks losing sales when a price is raised and when that price crosses a certain threshold. This psychological barrier is why many brands price at $1.99 rather than $2. This is relatively straightforward and intuitive to marketers.
While psychological whole-dollar thresholds tend to be most prominent, elasticity also varies between these price points, often driven by how competition is priced.
However, it is easy to overlook the context of competitive pricing. There is absolute price and then there is your price compared to your competitors’; the difference is the “gap.”
No brand exists in a vacuum. In order for it to make sense for the retailer to execute a strategy, one has to consider the entire category, not just a single brand alone. If a brand is considering implementing a new strategy, it must consider the impact that it leaves on the overall category. For example, increasing the price of a top seller might drive margin while sacrificing some unit sales. Increasing price too much might actually lead to fewer consumers even walking down the aisle, hurting sales for the entire category. Before implementing a strategy, take a step back and consider the potential side effects.
Mistake 4: Forgetting who stands between you and your customer
CPG manufacturers often invest a great deal of time, money and resources building smart portfolio optimisations, and then fail to consider their retailers’ priorities. When a manufacturer does pricing research, they too often think of the end customer as the customer—forgetting that the retailer is a key stakeholder standing in between. When that happens, you’ve just spent a lot of time strategising around a model that is ultimately irrelevant.
A brand must consider how the changes to its portfolio impacts the overall category for the retailer. If one is able to create a scenario that benefits both one’s own franchise, as well as the overall category, it is more likely the retailer will implement your suggestion.
This is especially challenging in developing markets, where distribution can be highly fragmented, with a lot of privately owned minimarket or provision stores. In this case, the brand needs to anticipate how retailers are likely to set their prices based on the price they pay. Keeping in mind that typical pricing strategies of small retailers may be to offer products at easy, rounded price points. A seemingly small price increase to the retailer at the wrong time can result in unintended drastic price increases to the consumer.
Mistake 5: Changing size without really considering value
In the eyes of the consumer, less is usually less. But sometimes it feels like more. Conventional wisdom tells us that any downsize without lowering price can leave people feeling shortchanged. But sometimes a profit enhancing 'downsize' can be framed as beneficial to the consumer, such as with convenience sizes.
Downsizing without considering the price/value proposition can lead to unexpected consumer backlash, especially if the change is noticeable. It’s tempting to downsize in the hope that it’s less obvious to consumers than a price change. It also allows the product to stay within its promoted price group, simplifying implementation. At best, you risk consumers noticing the loss in value that comes from getting less product for the same price. At worst, customers may feel like they’ve been cheated.
However, if the brand is able to downsize while adding some other value to the consumer experience, customers may be happy to pay extra for the added benefits.
Within the snacking category, convenience packs often carry a higher price-per-pound than their corresponding base items. However, they provide benefits such as being easier to pack in a lunch bag or maintaining freshness for longer, so consumers happily pay the premium.
This phenomenon is not limited to snack foods; coffee pods and devices are a popular trend despite costing many times more per serving than ordinary coffee grounds. The significant convenience factor of having a hot cup of coffee at the push of a button helps to justify the price differential.
A very different example can be found in developing markets, where we often see that the meaning of 'value' differs from that in developed markets. For lower SECs, a large pack of laundry detergent or shampoo (though cheaper per millilitre than a small pack) could be a big investment in absolute terms. Rather than investing a lot in a big bottle, they may prefer to buy small individual sachets that cost only a couple of cents each. The price per millilitre will be higher, but more importantly, the absolute outlay at any one time is much lower.
The big takeaway: Think outside the box.
Each of these lessons comes down to a single idea: Every action has potential unexpected consequences. Inside-the-box thinking happens when marketers fail to see beyond a single product, brand, portfolio, category or even their own P&L sheet. With the right pricing insights, each strategy listed above can lead to stronger and more dynamic portfolio management. Without them, negative consequences can ripple from the marketer’s desk to the customer’s shopping cart.
Robin de Rooij is director, Asia Pacific, and Oskar Toerneld is director, with SKIM. Anthony Kuo is manager of strategic analytics for North America Biscuits at Mondelez International.