Knowledge Bank Blog, Pricing & Promotions, Shopper Communication, Channel Execution

Price Quality Hierarchies

Are you protecting the price quality hierarchy in your category?

Everyday we make decisions around value for money.  What price is this product and is it worth paying?  These can be explicit decisions – deciding between BA and Easy Jet for a flight.  Or implicit decisions – at some point many of us decided that paying £2+ for a coffee was OK (and probably as many of us decided it was outrageous…).

In most areas of life there are clear choices across providers – do I go to the budget hotel or the 5* hotel?  Or within providers – do I pay extra for the sea view?  Having these different options at different price points is key to making choices clearer.

We think this is particularly relevant to the FMCG world.  As ranges have become more complex, as more products have been introduced at similar price points, and as promotions have intensified, some of this clarity has been lost.  Price Quality hierarchies have been distorted.

Why is this an issue?  Well, many category growth models are based on trading shoppers up.  Getting them to pay more for products that offer more benefits.  However, recent trends have worked against this.  Take one example – promotions.  They have significantly distorted the pricing architecture in many categories.  Many shoppers have been able to trade up without actually paying for it.  They are not trading up because they are prepared to pay more for the product, but because it is on deal.  And the next time they trade up, will be the next time it is on deal.

This has meant that products with quite different base prices can have average selling prices that are very close to each other.  In a few categories the premium product actually has a lower average selling price.  This can’t be good for the category growth model and probably isn’t very good for the choice that is being offered to shoppers.

So, how can we change this and better protect price quality hierarchies in a category?

Firstly, protect average selling price.  This is the product’s real price not its base price.  We often think we are maintaining a price quality hierarchy because the shelf price is 50% higher than a standard product. But the reality is, that the product is promoted so often, the average price differential is minimal.  You think you have a product priced at £1.50.  The shopper thinks you have a product that is worth paying £1 for.

This is particularly relevant to NPD.  Lots of new products are launched at a price premium, sometimes with little intention of selling at that price.  The base price is the price from which to promote, not one at which the majority of sales are expected to be made.  So, rather than trading shoppers up, the new product just becomes one of a host of other products competing at the same price level.  Not helping category growth, and probably making choice harder for the shopper.

Secondly, drive merchandising clarity.  Simpler, clearer merchandising, so the shopper can clearly see what is being offered at what price point.  Or different merchandising treatments for different price tiers.  Wine does this, Skincare does this, Beer has started to do it.  However, in many categories this doesn’t happen.  Are Walkers Sensations sold in a different way to standard Walkers crisps?  Not really.

Thirdly, give shoppers a crystal clear reason to pay more for a ‘better’ product.  There are typically 4 ways in which you can command a price premium.  Better quality – through taste, benefits or performance.  Health – for instance, offering functional health benefits.  Convenience – new product or pack formats that make life easier.  Meaning – associations that add value, such as “family time” with Old El Paso or “style and sophistication” with Peroni.  It is crucial to give shoppers one simple, compelling reason to pay more.  The one thing that allows you to justify a higher price and the shopper can use to justify to themselves why they are paying that price.

Probably the most important element in all this is holding your nerve.  If you don’t believe the product can hold a price premium, then you can bet shoppers won’t.  Everything you do – merchandising, promotions, packaging or messaging – is sending signals to the shopper about the price worth paying.  Getting these signals right is key to success.

Protecting and reinforcing price quality hierarchies is fundamental to offering clearer choice to shoppers and to driving category growth.  Are you protecting yours?

Feel free to forward.  Have a great weekend and speak to you next week.