How To Create A Profitable FMCG Pricing Strategy.

In the FMCG industry, your pricing strategy is one of the most vital components of a successful brand strategy. Hitting the sweet spot of pricing can skyrocket the company’s overall profit. Conversely, the wrong FMCG pricing strategy can traumatic impact brand performance.

The right FMCG pricing strategy boosts overall product sales, builds stronger customer loyalty, and gains a competitive edge over rival brands. Therefore, it is essential to have an effective pricing strategy that keeps up with the latest FMCG market trends while maintaining a healthy and steady cash flow.

However, setting the right pricing strategy is a challenging task. There are many variables to consider when selecting the correct product pricing.

This article discusses the importance of having an FMCG pricing strategy. It explains how companies can develop effective pricing strategies for strong positioning and to stay ahead in this highly competitive industry. So without any further ado, let’s get into it!

Factors That Impact FMCG Pricing

When mastering the right pricing strategy for FMCG products, one must know all the factors influencing pricing. Here are some of the main factors that all FMCG companies must know when setting competitive prices.

Production Costs

The first and most significant factor influencing FMCG pricing is the cost of production. It covers everything from the procurement of raw materials to the goods’ manufacturing, packaging, and transportation.

The first rule is to set the pricing of the products so that it intelligently accommodates the cost of production yet leaves enough profit for current expenses and the ability to scale.

Consumer Demand

Consumer demand is another crucial game-changing factor when setting pricing strategies for FMCG products. Simply put, the law of supply and demand also applies to FMCG products.

Companies can charge a higher price if the demand for a particular product is high (for instance, shampoo or soap).

It will not affect the product’s sales because it is already in demand, and people will be willing to pay higher. In other words, consumer demand sets the dynamic pricing of the products.

Pricing based on consumer demand can be tricky as it requires constant monitoring and communication with FMCG retail partners.

Competitor Pricing

In FMCG, keeping track of the competition is highly important. Businesses need to analyze the market regularly and monitor the competitor’s pricing.

Competitor pricing is crucial for brands without strong positioning because if a company charges higher than its competitors, it will soon lose customers. They become an outlier due to the high pricing of the same product that others sell at a more reasonable cost.

Hence, brands should focus on marketplace differentiation before creating a pricing strategy.

Target Market

Another essential factor to keep in mind when developing an FMCG pricing strategy is the target market. It plays a massive role in increasing the number of sales and can help generate a handsome amount of revenue.

Companies need to analyze and understand various aspects of their target customers to set the right price for their products. It includes demographics, psychographics, purchasing behavior, etc.

For instance, if the target market consists of price-sensitive consumers, the company may set a lower price to attract and retain customers. An excellent example of this can be a low-cost snack product that targets college students.

Because college students have limited disposable income, the company must set its prices within the customers’ budget to generate sales and revenue.

Brand Positioning 

As mentioned, the brand position can also influence the pricing of the products. FMCG branding must establish a specific position magnifying the brand image and reputation. You can identify whether you should charge higher or lower for your products with the right brand position.

For example, consider KFC and Mcdonalds’ in the fast food business. These brands have a good image and reputation in almost every country. Therefore, charging higher prices for their products will be fine.

Different FMCG Pricing Strategies

You now understand how pricing significantly impacts a company’s profitability and competitiveness. So let’s look at some of the most effective pricing strategies used for FMCG products.

Cost-Plus pricing

Cost-plus pricing is a strategy in which companies set the pricing of their products based on the cost of the production plus a market to ensure a reasonable profit margin.

It is one of the most straightforward strategies but ineffective in a highly competitive market.

Penetration Pricing

Another commonly used marketing strategy is penetration pricing. In this marketing strategy, a company initially sets a lower price for its product to gain a market share and attract price-sensitive customers.

Penetration pricing strategy can be highly effective in a competitive market and help companies establish a foothold.

Price Skimming 

In contrast to the penetration pricing marketing strategy, price skimming involves lowering the pricing according to competitors.

Initially, the company would set high prices to target early adopters and customers willing to pay for a new, premium product.

Once a rival brand launches a product, it reduces prices to gain a competitive edge.

Promotional Pricing

Another highly effective FMCG pricing strategy is called promotional pricing. In this strategy, the company offers customers different discounts or special deals to stimulate FMCG sales—food companies such as Kellogg’s use this strategy regularly.

Psychological Pricing

Psychological pricing is a pricing strategy in which a company sets prices based on psychological factors such as perception, emotions, and beliefs. Consumer behavior can improve revenue generation to a greater extent.

It includes strategies such as odd pricing, where a product is priced at $9.99 instead of $10, to create the perception of a lower price.

Pricing Tactics Used for FMCG Pricing

Companies use different tactics to optimize their pricing strategies, boost their sales, and generate great revenue. Below are some of FMCG marketers’ most widely used pricing tactics.

Product Bundling

Bundling is a pricing tactic in which a company offers multiple products at a discounted rate. There is usually a big difference between the price of a single product vs. the price of that product bundled with others.

It is one of the effective methods to encourage customers to purchase multiple products or services and increase their overall spending.

An excellent example of a bundle pricing strategy is a fast-food chain offering various meal deals, including burgers, fries, and drinks.

Dynamic Pricing

As mentioned earlier, it is one of the most effective strategies that involves setting the pricing of the products based on their real-time market demand, competitor pricing, and other external factors.

Price elasticity maximizes the profit earned by adjusting the prices of the products based on market conditions. An excellent example of a dynamic pricing model is airlines, which adjust their ticket prices based on demand and availability.

Price Discrimination

Last but not least, price discrimination is a tactic widely used by FMCG companies where they set different prices for the same product based on customer segment. Geographic location, income level, and age may influence the costs.

It can effectively maximize revenue by charging customers willing to pay a higher price while attracting price-sensitive customers.

Is this a morally sound strategy? We will let you decide, but a better strategy is to create smaller packaging options for price-sensitive consumers.

How to Implement an FMCG Pricing Strategy

Here are some key considerations when implementing an effective pricing strategy for your FMCG products.

Determine True Costs

When setting prices for your FMCG products, it is essential to determine the product’s actual cost first. It includes the cost of production, distribution, marketing, commissions, and more. You have to get very granular to determine the true costs of your product.

Furthermore, fluctuations in the cost of the goods must also be considered when setting prices and the cost of discounts, promotions, and retailer fees. So always leave margin when creating your true costs.

Consumer Research 

Companies must thoroughly understand their target market before setting an effective pricing strategy for FMCG products.

Consumer research can help identify the high price points for customers and ensure that their pricing strategy is aligned with their needs and preferences.

In addition to this, it can also help in the identification of the price sensitivity of the customers and competitive landscapes.

Packaging Congruence

The packaging of your FMCG products plays a vital role in setting prices. Your FMCG packaging design and messaging should align with your pricing strategy and brand positioning.

For example, premium-priced products should have high-quality packaging that reflects their premium status, while budget-priced products may or may not need plain packaging. Here is where package design testing is essential.

Testing Your Pricing Strategy

Before launching a new product, it is wise to test the pricing strategy to ensure a smooth launch. Price testing may involve different pricing tactics and closely monitoring the customer response to those tactics. It can help refine the pricing strategy and ensure the company gains maximum profit.

Ethical Considerations in FMCG Pricing

Ethical considerations are crucial when setting the prices for FMCG products. Speaking of ethical considerations, a brand must ensure fairness, transparency, and social responsibility. Unfair or deceptive pricing practices can negatively affect the image and reputation of the company and brand loyalty.

Successful FMCG Pricing Strategies

Here are two case studies of FMCG companies that have successfully implemented different pricing strategies and boosted their sales.

Coca-Cola 

Coca-Cola is one of the world-renowned brands considered a global leader in the FMCG industry. The company uses a highly effective pricing strategy vital to its success.

They use a premium pricing strategy for their excellent products, which include Coca-Cola Classic and Diet Coke. Besides that, Coca-Cola also uses promotional pricing tactics such as discounts, coupons, limited time offers to drive sales and enhance its market share.

Coca-Cola has run successful promotions such as the “Share a Coke” campaign, where customers can personalize Coke bottles with their names and the names of their friends or family members.

Dove

Another leading brand in the world of FMCG products is Dove, which is familiar for its high-quality soaps and shampoos. The overall pricing strategy of Dove is based on value-based pricing, meaning that each product is priced according to the value it provides to the customers.

For instance, they produce high-quality, gentle, and moisturizing soaps, which allows the company to charge more than other soap brands. Furthermore, the company uses price-skimming tactics whenever introducing a new product.

Future Pricing Challenges Facing FMCG Brands

As the FMCG industry continues to evolve and grow, brands face several challenges when pricing their products effectively. Here are some of the main types of challenges that FMCG brands have to face when pricing their future products:

Increasing Competition

One of the biggest challenges facing FMCG brands is increasing competition. With the rise of FMCG ecommerce and social media, it is easier than ever for new brands to enter the market and reach consumers.

This increased competition puts pressure on FMCG brands to differentiate themselves through pricing strategies that offer value to consumers while maintaining profitability. FMCG brands must be creative and innovative in pricing strategies to stand out in a crowded market.

External Factors Causing Price Sensitivity

External factors such as economic conditions, political environment, and cultural trends can also significantly impact FMCG pricing. For example, consumers may become more price-sensitive during economic uncertainty or a recession and look for value-based products.

Similarly, cultural trends such as sustainability and ethical production practices can influence consumer purchasing decisions and pressure FMCG brands to adjust their pricing strategies accordingly.

How to Adapt to Changes

In today’s competitive marketplace, FMCG brands constantly face challenges from competitors who offer similar products at lower prices.

It can lead to price wars and undercutting, negatively impacting FMCG brands’ profitability. Here are some tactics to cope with such kinds of situations.

Differentiate Your Products: This can be achieved by focusing on unique features or benefits that your products offer that cannot be found in your competitors’ products.

Focus on Value: This can be achieved by offering additional services or benefits your competitors do not provide. For example, you could offer free delivery or installation services, extended warranties, or loyalty rewards programs.

Monitor Your Competitors: This involves performing ongoing FMCG market research to understand similar products’ price points and adjust your prices accordingly.

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