Author: Robert Ribciuc, CPP, CFA
For many brands, important cost components will continue to erode the bottom line in 2023. With most brands taking some price increases in 2021-2022, signs of softening demand may be a looming reality for a variety of industries, brands, and sections of any given brand’s markets. What should companies do to combat these economic factors? In this article, the author looks in some detail at three pricing power moves that illustrate that consumer brands always have additional pricing power to find, nurture, and harvest. Robert Ribciuc, CPP, CFA, is the Managing Partner of EBITDA Catalyst, a boutique advisory firm specializing in pricing strategy, analytics, and execution. His experience includes consumer brands, SaaS/software companies, and PE firms whose portfolio companies have monetization, pricing, and revenue opportunities that require specialized expertise. He can be reached at email@example.com.
The Pricing Advisor, February 2023
In recent articles, I have proposed expanding the accepted meaning of “pricing power” to include the full toolset of pricing and offering design, as long as such actions drive gains in a company’s earnings metric. In this article, I look in some detail at three pricing power moves to illustrate that consumer brands always have additional pricing power to find, nurture, and harvest.
Move #1: Targeted actions to “take price” intelligently:
For many brands, important cost components will continue to erode the bottom line in 2023. With most brands taking some price increases in 2021-2022, signs of softening demand may be a looming reality for a variety of industries, brands, and sections of any given brand’s markets. What to do?
Increasing prices will remain a key component of a brand’s pricing power but will need to evolve to its more intelligent forms. Blunt force price actions will need to be replaced with actions carefully designed to “thread the needle” and avoid collision with the pockets of sagging consumer willingness to pay (WTP). Specifically, taking price intelligently will require careful selection of:
- Where: What products, markets, and channels still offer favorable breakeven analysis and consumer behaviors/price elasticity patterns conducive to further actions?
- How: Should you attack highly visible list prices, selling prices, etc.? Or should you operate somewhere else in the price waterfall (cutting discounts, eliminating “giveaways” like points and cash rewards, or reducing pack sizes)?
- Whom: Can you target actions to affect some customers but not others? For example, using surcharges or charging for returns to increase prices on higher cost-to-serve or inconsistent, long-tail customers?
Brands from Amazon to Zara are busy with such surgical actions, from reducing % cash back on Amazon credit card purchases to raising delivery fees or purchase amounts necessary to get free delivery to charging fees for some or all returns. Every brand should have a thorough review of available levers, with a rank-ordered impact list and a deployment plan with clear timing and triggers.
Move #2: Monetize previously “lowly” low-cost assets into pricing power that moves the needle:
This “get creative, make something out of nothing” strategy is a favorite of ours. It reflects a brand’s attitude that it should leave no stones unturned, no assets unutilized, and no previously held beliefs unchallenged. It finds and harvests additional pricing power in unexpected places, whether with surgical tactical offers or with transformative strategy twists.
Recall that we purposefully defined pricing power broadly to include all measures with pricing and offering design that drive our target profit and valuation metric. Now consider these examples:
Example: Netflix’s decision to finally adopt ad-supported, lower-priced plans:
I wrote extensively at the time about the brilliance of the Netflix pricing power move. It finally monetizes the previously ignored assets that were there all along: value to 3rd party advertisers of Netflix’s patient, glued-on customer eyeballs, made even more valuable by extensive data and preferences-targeting AI. Plus: the customers-in-waiting that would convert at a lower price point (often an “invisible”, “lowly” perception asset, because human decision-makers undervalue foregone gains, and overvalue fear of loss: “this will cannibalize our existing customers!”). Technically, introducing a lower-priced package could qualify as a “price decrease” if only list price was concerned, except that Netflix finally realized it can harvest pricing power by including 3rd party dollars in its understanding of “price.”
Netflix has picked up tens of billions of dollars in market cap since the move and has reported 7.7M new subscribers in the first quarter since the move, thereby reversing a couple of years of sagging or negative growth.
Example: Panera’s “Unlimited Sip Club” subscription
For $12/month or $120/year, the “Unlimited Sip Club” gives subscribers a free beverage per visit (note how “per visit” subtly makes this beverage not really free, unless you were going to visit anyway!).
This subscription is also offered “free for 4 months,” “free for 3 months,” and “free for 1 month” depending on if you are an American Express cardholder checking offers or just any subscriber. Just like Netflix’s ad-supported tier, they would probably give it to you for free for a long while if you could keep it a secret because the money is not in the subscription price!
Panera’s subscription plan monetizes a low-cost asset: its beverages.
How much do all these free beverages really cost Panera? Everyone knows the actual cost of beverages is negligible – pennies per cup. This makes them the cheapest thing in the store for Panera to potentially give away in larger quantities (that affordable low-cost asset looking for better monetization). Of course, the real cost, if any, is from customers that would have purchased that lemonade for full price ($3-4 of pure profit) and now get it for free. But the targeting works great for Panera here too. Those are likely the very “great customers” worth rewarding to maintain their loyalty, bring them into the restaurant a couple of extra times per month, and convert them into paying subscribers after the free trial!
Example: Amazon’s “digital credit” nudge to save big on delivery costs and stimulate high-margin digital sales
How brilliant is this pricing power move? Amazon makes customers seemingly small in-cart offers, such as: accepting slower delivery by consolidating multiple Prime deliveries into one for a credit against “select digital purchases” (typically in the $1-2 range).
The digital credit offered is higher for carts that would require Amazon to ship multiple packages and incur higher expedited shipping costs due to demanding Overnight or Prime delivery windows.
In one fell swoop, it makes the customer happier with additional choice, it puts serious dollars of net profit back in Amazon’s pocket (by reducing packaging/labor/freight/delivery costs from multiple packages), AND it puts a nudge in the customer’s account to make yet another (highly profitable) digital purchase with the “credit.”
Amazon effectively extends their offering design with choices for “how much do you really need/value Prime delivery for each purchase”? The word “credit” craftily makes it sound like a price reduction, and it looks for further segmentation. Just like Netflix’s customers willing to watch ads for a small “digital credit” in the subscription price are worth a lot more to Netflix in advertising dollars and the “credit” may convert additional customers that wouldn’t otherwise even be customers, Amazon generates both large cost savings and additional demand for profitable digital purchases from any customers who take the $1-$3 “credit” offer (the amount of credit “slides” with the number/size/cost of additional deliveries and the “rush factor”). The “offer” is not just virtually costless for Amazon – it may in fact result in net revenue at high margins!
Move #3: Price pack & portfolio plan for inflation and softening demand
When inflation and other agents like supply-chain failures bring high-velocity changes to the supply-demand balance, brands need to evaluate diligently if their product portfolio choices expand or constrain their pricing power.
The most pressing analysis is whether a brand’s price pack architecture (or product line-up) provides coverage and margin-optimizing choices to anticipate “where the puck is going” in consumer preferences.
- Are products that drive large portions of our profit pool presented as binary choices: “Purchase this: Yes/No”? If a consumer says “no thanks” to a brand’s higher price on one of its “hero SKUs” is she (and the pocket share/dollar contribution margin from her purchase/continued loyalty) lost for the brand?
- Or do we have “off-ramp” options – products that she finds as acceptable substitutes that allow us to keep both her customer relationship and a healthy “alternative” dollars of contribution margin under our brand umbrella?
Depending on the location of the profit pools and specific threats to each one, brands may consider:
“Off-ramp” optionality for hero SKUs
Particularly relevant for fashion (footwear and apparel), electronics, or other markets where brand and in-trends play a key role in the purchase decision and the unit prices are “significant” for some budgets.
- If SKU A drives millions of dollars in contribution margin, and its price is moving up over hurdle X that is significant to elasticity, should the brand first have SKUs B and C in place that may offer either lower price point or more features as “off-ramps”?
- Brands like Apple, Nike, Birkenstock, or General Mills are exceptionally adept here.
Club-size or family packs
For groceries, cosmetics, and SKUs that are generally purchased less frequently and consumed over time. If consumers buy your product an average of one to two times per year, either as a treat or something they can “spread out” consuming over time, it makes sense to have options for consumers who are willing to leave a higher dollar amount in revenue and contribution margin in one purchase and reward them with a better price per unit of volume/value. This is even more compelling if your “regular size” hero SKU has been moving up in price significantly in response to inflation.
Particularly relevant for CPG/products that are frequent or habit purchases and where private label or lower-priced competitors present easily available choices to lure budget-sensitive consumers. This controversial tactic avoids drifting upwards into “unacceptable” price points, and leaves it up to the consumer to do, or not, the due-diligence to understand that they’re paying more per unit of value.
This is a shortened list, with a number of other go-to pricing power moves left for future installments. Still, these examples should remind and boost conviction that there are always pricing power moves for every consumer brand to make. What will be your next pricing power move in 2023?