Knowledge Bank Blog, Pricing & Promotions, Channel Execution

Breaking the Value Rules

How many of you have heard of Gillis Lundgren?

Lundgren worked as a Catalogue Manager for a mail order business.

One day he was tasked with delivering a new leaf-shaped table called “The Lovet” to a nearby photo studio so it could be shot for the new catalogue.

It was 1953. Lundgren only had a small car. He tried to fit the table into the car. But no matter which angle he tried the table wouldn’t fit. Then he thought “why not take off the legs?”

So he did. The table easily fitted into the car.

The mail order company Lundgren worked for was Ikea. Lundgren set up a meeting with the owner Ingvar Kamprad. Then convinced Kamprad to make flat-pack furniture the cornerstone of their business model.

This meant that Ikea’s furniture was more affordable than competitors as they were passing the assembly process on to customers. It meant Ikea’s stores could stock more furniture than competitors. It meant the furniture was easier to transport. They could transport 10 times more than competitors for the same cost.

Lundgren challenged one assumption. That furniture needed to come fully assembled.

By doing so he started a flat-pack revolution. One that has turned Ikea into a company with €42 billion of annual sales.

Why are we talking about this? We’re operating in a really challenging environment. The highest inflation rate for 40 years. Retailers in a fierce price battle with each other. Retailers challenging brands directly on price (Morrisons Compare & Save).

Manufacturers are under pressure to get price increases through. But they are also under pressure to give shoppers value. So they often default to the usual assumptions about how to give shoppers value.

Do more price promotions. Do deeper promotions. Do a bit of shrinkflation.

But when you make the usual assumptions, you end up doing the usual things. The FMCG equivalent of fully assembled furniture.

But what if you challenged these assumptions? What if you said, “why not take off the legs?”

Here are a few examples…

Assumption… Discounter shoppers are looking for the cheapest products. Are they? Discounter shoppers choose to shop in a cheaper store, but they don’t necessarily choose to buy the cheapest products. For instance, many Aldi shoppers will buy from the “Specially Selected” range. They know these products will cost more than standard products. But they also know these products will be a lower price than premium products in other retailers.

Many premium brands think they don’t want to be in Discounters as it will drag down price. Then they do big price promotions in supermarkets which drag down average selling price anyway. They worry that being in a Discounter will harm their brand equity. Forgetting that the Discounter often has a higher brand equity than they do.

Peroni are a great example of a brand challenging these assumptions. They are in Aldi. A 6 pack for £8.99. They are where shoppers are. At a price that maintains their premium positioning.

Assumption… Promotions are about driving short term uplifts. To an extent they are. Get your brand on a gondola end at £1 and you’ll shift a lot of volume. Do it again and you’ll shift some more volume. But over time this ends up rewarding shopper promiscuity. The shoppers who get the best value are the ones who buy you at £1 this week. Then buy your competitor at £1 next week. You are training them to buy you on deal.

But what if you rewarded shopper loyalty rather than promiscuity? Gave shoppers an incentive to buy your brand each time, not just when you’re on deal. It could be reward schemes. Think Yeo Valley Yeokens. It could be subscriptions. Think meal kits. It could be refills. Think Cif or Nivea eco refills.

What if you spent more money trying to drive long term uplifts not just short term ones?

Assumption… All shoppers should see (and therefore pay) the same price. The usual assumption is that all shoppers should get the same price. You can’t charge shopper A one price and shopper B a different price, right? But this already happens. Different shoppers pay different prices for the same thing.

For instance, the shopper who buys a 24 pack of Coke pays a lower price per can than the one who buys a 12 pack. Who pays a lower price per can than the one who buys a 6 pack. Who pays a lower price per can than the one who buys a single from the chiller. This means that the shoppers who get the best value are often the ones who least need it. The ones who can afford to buy the 24 pack of Coke.

What if you changed this? What if you targeted shoppers who most need value? Rewarded shoppers for cumulative spend (buying the six-pack 4 times) rather than buying the big pack once. What if you did more personalised promotions? Through loyalty cards; think personalised Nectar offers. Through Direct to Consumer; think Brewdog.

Other industries do dynamic pricing. So can the FMCG and grocery industry.

These are just a few examples. There are plenty more.

To identify them take a step back. Think about your current assumptions. Then reverse them. Say, “why not take off the legs?”

Why should Ikea assemble furniture when they can get us to do it?

Feel free to forward. Have a great weekend. Speak to you in fortnight.