Host:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators and the doers who are right now rebuilding the world around us.
Alison Schilling:
Hi everyone. My name is Allison Schilling and I'm a partner at L.E.K. Consulting. Today, I'll be the host for our discussion on how to price in a post Covid, post inflationary world. I'm lucky to be joined by my colleagues, Claire Morgan and Rob Haslehurst, two of my fellow partners here at L.E.K. in our consumer practice and authors of our recent perspectives piece published on this very important pricing topic. Rob, Claire, welcome. Can you give us a little bit of background and tell us a bit why you think this is such an important topic for us to be talking about?
Rob Haslehurst:
Absolutely, Alison, and thank you for having us. So I lead our global pricing service line here at L.E.K., and this is a hot topic for so many of our clients coming out of Covid. We understand that consumer businesses have faced really dramatic increases in input costs over the past couple of years, and to avoid profit erosion, most responded by raising prices. But consumers are faced with economic headwinds themselves. They're faced with increased prices across the portfolio of what they're buying, and they're adjusting their spending behaviors to the new reality as well. Although the worst of spiraling inflation is hopefully behind us at this point, brands are having to really think about reevaluating their holistic pricing strategy to meet consumers in a new place where they are.
Claire Morgan:
That's exactly right, Rob. And thanks again, Allison, for having us. We really are in uncharted territory right now with emerging from Covid and the concerns that consumers have about a potential economic downturn this year. So now really is the time to think about pricing strategically, and I would say there are three key reasons why we think pricing is so important to focus on these days in addition to the fact that it can drive top line growth. First of all, changing prices immediately impacts the bottom line. So it's a really important and direct lever to pull. Second, pricing adjustments typically don't require broad organizational or operational changes, so they can be actioned very, very quickly at any point in the value chain. And the third point I would make is that pricing is a key indicator of brand positioning and consumer perceptions. So getting it right is absolutely critical to the brand overall, not just to the economic impact that it has.
Alison Schilling:
Those are really great points, Claire. When we talk about pricing, we hear a lot about value-based pricing and being touted as the gold standard because it considers consumers perceived value of an offering in determining the price that we're going to charge for it. It sounds like we moved away from value-based pricing during the pandemic when other priorities were paramount. How do we change the conversation and get back to talking about value rather than price?
Rob Haslehurst:
That's right, Alison, because the pandemic just caused so much disruption in the cost base of businesses, many of those businesses that had originally set their prices with a value-based approach effectively moved away from that. They marked up their prices on a cost plus basis, and we see it as really risky for businesses to sit for too long with that approach. Over the long term, it either means suboptimal margins and not getting what they need from customers, or potentially pricing too high and giving customers an excuse to leave you at the first opportunity. It's the opposite of value-based pricing and we know that that's wrong. Even if inflation does stick with us for a bit further, volatility does seem to be back down and we think now is the time for business leaders to reexamine the value positioning and their pricing relative to that value and relative to what consumer segments are ultimately willing to pay.
So, with consumer wallets being spent very differently to pre-pandemic, about the only thing you can be sure of is that the answer is going to be different to what it looked like in 2019, and we think that the need to holistically consider the pricing model is going to be paramount for so many consumer brands. What does that mean? It means considering their strategic price positioning. It means looking at levers such as segmentation and thinking about packaging. Potentially considering dynamic pricing, pricing differential by channel, as well as how do they use promotions to capture the most value over time from different types of customer.
Alison Schilling:
It sounds like we really could not be talking about this at a better time, with so many things happening all at once. Claire, are there examples you can share of how companies have put this into practice? Where have you seen this work particularly well?
Claire Morgan:
Yeah. So as a partner, I split my time between food and beverage, and travel and leisure, and both of those industries have great examples of this value-based pricing concept. I would say on the food and beverage side, private label brands are the first thing that come to mind where these alternatives that are branded by the retailer routinely enter product categories as a low-cost alternative to branded goods. So you might have the Kraft mac and cheese and then the Kroger brand, or the Jewel brand, mac and cheese. Those products are typically positioned at the outset as a me-too type of offering to gain market share and they're able to offer that competitive pricing because they don't spend nearly as much as the national brands on marketing, on trade, or other kind brand-building activities. Once that market share is established though, some retailers have done a really great job of creating multiple tiers within private label so that they have an offering in that value space and even in more mainstream and premium categories.
Now, on the travel side, airlines are the classic example of dynamic pricing. In an aircraft, you have a fixed inventory service with a set number of seats on a plane on a given day, but the price of that seat can fluctuate minute to minute up until the day of the flight depending on a variety of factors. So what you end up with is passengers sitting next to each other who may have paid very different prices for those neighboring seats. Now, airlines are certainly not the only example of that. Dynamic pricing has been used across concert tickets, sporting events, ride-share apps, you name it. But I think a really good example of how it can be adjusted to supply and demand.
Rob Haslehurst:
Dynamic pricing is really great. It allows businesses to capture that incremental revenue that they couldn't have captured at a static price because they recognize the demand in the moment of the consumer and how much they value that product, but it can be difficult to implement. The airlines have built really robust revenue management tools and have spent years, decades even, honing those, and we recognize it's not relevant for every situation, but some of those principles actually can be brought in and helpful in other situations. So if you think about, for example, a retailer adapting their promotions to market conditions or adapting their promotions to the time of week or the time of year such that they can manipulate the price to something closer to what we feel consumers are willing to pay and using data to feed back into how they make those changes, maybe not on a minute to minute basis like the airlines, but on a week to week basis.
And they can also do that through, for example, their loyalty program and using that to offer effective discounts on a more dynamic basis than the price on the shelf. Even outside of that dynamic basis, sort of more static price positioning is used across most consumer goods. So you think of Claire's example with the mac and cheese, I think that's a good one, but you can see it across so many other sectors of the economy.
So I spend a lot of my time in the automotive sector, and that's one where you see the different OEMs use a variety of different tactics to create vehicles of different price points to meet different consumer needs. Some of that, they do using different brands in order to avoid cannibalizing each other. So you think about an operation like Volkswagen Group, for example, that owns brands ranging at the top end from Audi and Bentley and Lamborghini and Porsche, but also the core VW brand, which meets more of a mass market need. But even within that, even within any given brand, there are usage of different trims, usage of different elements to find the products that the customer values, find the price they're willing to pay, and give them an offering in order to meet that value.
Alison Schilling:
Those are great examples and really highlight, I think, that there is not one size fits all here. I think it shows that you have to think about it in the context of your product and your customers, and that's obviously very important. If we get beyond overall approach to pricing, how should companies really think about using pricing as a tool to create differentiation in their portfolio? Claire, you mentioned this before. I assume there can be differentiation across brands, across channels, across products, but I imagine that can be difficult to do.
Rob Haslehurst:
It can, but it's very doable. So we use an approach called Feature Benefit Analysis as we kind of think about how to match the features with the benefits and use that to create a set of products that work for different customer segments. Sometimes it's called packaging, but broadly it's about creating those products that are necessary to meet the needs of customers. So if you evaluate demand for different product attributes across different types of customer, and you can use various different analyses for this, we'll often use an approach called Conjoint Surveys. You can match that against market supply and identify the real sweet spots where there is willingness to pay more or pay less for something different. And you can use that information to essentially tease out variants of the product that meet the different customer needs. And then offer all of those needs to customers and allow them to opt into the right product for them.
So care washes are a really simple example of this that we see in our day-to-day life. Most of them had teared offerings where you've got the basic wash, sort of wash, maybe it has a dry and a simple clean, but then you move up to different levels of more advanced washing and waxing, even all the way up to a sort of intensive detailing offering. And there's lots of offers in between to allow each consumer the chance to opt into what they value for their car.
Claire Morgan:
And Rob, I'll confess, I never pay for the premium car wash. I always do the basic.
Alison Schilling:
Same, player. I'm a basic girl in that aspect as well. I think that was a great example though, Rob. It makes also makes me think of something like Ikea, which has done something similar, different category, but they realize that some people are comfortable assembling their own furniture and picking it up rather than having it delivered and already ready for you and your home already assembled. So they disaggregated the pricing upfront and so you can really choose your path. What makes sense for you as a consumer when you're thinking about how you want your furniture to show up in your house. I personally don't pay for assembly. I'm going to do it on my own. I'm going to build it myself.
Claire Morgan:
Alison, assembly is something I am more than willing to pay for every single time, but everyone is different and that's exactly, I think, the point that you're trying to make with that example.
One other piece I wanted to offer on this topic is when we think about pricing with the Feature and Benefit Analysis that Rob mentioned, price pack architecture is another tool that we will talk about a lot with our clients. It's probably worth spending a minute on PPA. So, PPA is the art and the science of designing a portfolio that really optimizes those features of each product based on consumer willingness to pay.
So a good example of that would be in fast moving consumer goods. Think about dish detergent as a good example. Cascade or Tide, their core product is a large bottle of liquid detergent, but they realized that consumers are willing to pay a premium for convenience. So they've developed these Tide pods or these items that offer a premeasured detergent pack that eliminates the guesswork and the mess that you might have with that big bottle of liquid detergent. That's something that we've seen applied across consumer product categories with Coca-Cola and their mini cans, Campbell's Soup and their microwaveable cups. There's a variety of different ways that price pack architecture has been used and I think is a really important piece of the puzzle here.
Alison Schilling:
Personally, I love the Coca-Cola mini cans. It's the right size. I'm willing to pay more because then I don't have any waste. So those are great for me.
Claire Morgan:
Even though they're a higher price on a price per ounce baseless.
Alison Schilling:
Exactly. Well, so we've talked a lot about setting the top line price with PPA or some of these other examples, but it's not really the whole picture for pricing, is it? How do you think about the other piece which is promotions or discounting strategy? It seems like, in this current climate, promotions can be especially important really to ease consumers into higher price points and preventing some of that trade down behavior that I think lots of brands right now are concerned about. It also offers a bit more flexibility because you can change list prices and it can be more customized and varied, but keeping that ultimate list price the same. Is there such a thing as over promotion and how do you think about this tool and how do you manage it in today's environment when it might be more important than ever?
Claire Morgan:
Yeah, you are spot on with that comment. With promotion and promotional strategy, the devil is in the details and companies really need to optimize their discount depth, their offer type, the day of the week and the time of the year that they're promoting so that they're hitting that sweet spot around consumer attitudes. So, designing the right promotion, choosing what products and services to include and varying that depending on the sales channel how you're going to market. That's really important as well because shopper behaviors and preferences and expectations are going to differ significantly whether they're shopping online, they're going to a traditional grocery store, or they're going to a specialist auto shop retailer, for example. Now I will say for brands that sell in that traditional brick and mortar retail channel, the trade spend budget is key to funding those promotions in addition to funding displays and circulars and slotting fees. So we often help our clients think about finding the optimal mix between trade spend and broader marketing and advertising. That's something that should be continuously evaluated and reset as market dynamics change.
Rob Haslehurst:
And to your other question, Alison, about is over a promotion a thing? I think there's evidence that it can be, but also that it cannot be. Many of our clients worry that offering too many promotions may damage the brand, and that's something that we dug into in some of our recent work. So, while there is evidence clearly that too frequent use of deep discounts can dilute the brand and potentially be economically harmful, there are some benefits to promotions and benefits specifically to the way that consumers perceive promotional brands that I think shouldn't be ignored. So, our analysis shows that promotions actually typically contribute positively to net promoter score. So that's the level of satisfaction with the retailer, the level to which you would recommend the retailer. And that means really across retailer types, consumers generally view strong promotional activity as a reason to signal value and therefore a reason to recommend the company to others.
The one area where that isn't true that we found is in luxury retail, whereas you might imagine overall promotions can be damaging to the overall brand reputation and the price perception of that product. So having some level of frequent promotions is valuable, but doing it too deep can really hurt the brand. Still, promotions are only one piece of customer engagement. Retailers with vastly different promotional strategies end up with different levels of promoter score. So we're certainly not saying promotions are the be-all and end-all, but don't be afraid to use them within your portfolio. Groceries are a good example where you have some retailers that really don't promote, have an everyday low pricing strategy like at Aldi for example, and other retailers, other grocery stores like a Publix that takes more of a high-low perspective on how they price. But ultimately consumers regard both pretty well. There's a clear positioning in the market that the value proposition is there and people are willing to promote the two retailers that work quite differently at about the same level.
Alison Schilling:
So it sounds like there's really no clear or simple yes or no on should we promote and when should we promote, but really needs to be considered as a critical part of overall pricing strategy and how brands and businesses think about pricing more broadly. Well, thank you both for your time and insights and ability to bring this to life for us all. It's clear to me that, while today's macroeconomic environment is challenging, it also offers a lot of opportunity for business leaders and brands to rebuild their pricing strategies from the ground up in this new environment that we're in and really kind of get back to the fundamentals. For listeners, thank you for your time. We're happy to provide more detailed discussions on requests, and we invite you to connect with us to learn more about how L.E.K. can help your business and think about a holistic pricing strategy. We'd love to chat more.
Host:
Thank you, our listeners, for joining us today at the Inside Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
