Pricing Your CPG Product – Episode 2

This is CPG Insiders, the podcast that helps consumer packaged goods companies survive and thrive in business. Now your hosts, Mark Young and Rob Taylor. Welcome everybody, to this edition of CPG Insiders. My name is Mark Young. I'm here with my partner in crime, Rob Taylor.

Hello everyone.

Well, that was so cheery, both of you. You know, Rob, what we want to talk about, we get a lot of people ask us this question and the question is, how should I price my CPG product? And we work with a lot of products. We see products that are low price leaders, middle of the pack, you know, pricing, premium pricing. So let's cover a little bit of that. So if you had a choice, if you were launching a CPG product today, would you go after being the low price leader in the middle or would you try to be the highest price premium product, two parts?

If I could justify it, and if the product fit well enough and was valuable enough to the consumer, I would tend toward a premium price product. If not, I would try and be a premium lower price product. So middle of the pack, if you think of the old days of salon graphics, they were a premium priced value product where there was a good value proposition.

Yeah, they were at the very top of the non salon category and I.

Think that was a good place for them. But if you can find a place where your product fits and adds a good value to the consumer's life, you can charge a lot more for it. My preference would be to be in that, that area.

The products that we have had the most success with, long term success with here at our agency, have almost always been the premium product. So here's why. Let's run through some explanations here. One, first off, when you make a premium product, you have the margins to be able to go out and make a better product. Now, research shows that when you look at the very cheapest, the very lowest price product in a category, you look at the very top product in the category and I find this to be interesting. But think about this, Rob. It's pretty consistent. There's about a 10x price difference between the bottom and the top. So there's a $1.99 hairspray and there's a $19 hairspray. There's a $1 toothbrush, there's a $10 toothbrush. However, the same research shows that the products that are at the 10x price had a 4x cost of manufacturing. So it didn't cost 10 times more to make salon graphics, using them as an example, than it cost to make White Rain. In that particular case, it probably cost twice as much. But White rain sold for 299. Salon Graphic sells for what, $16.99.

We have the same similar experience in pain relief or, you know, yeah, I get where you're going. I definitely follow there.

But the idea is the higher price product lets you make the better product. Now here's the next thing. When you're a new product or a challenger brand, you survive on advertising. When your product is a premium product, you have the margin to advertise. When your product is a low price product, you don't have the margins to advertise.

Right? Yeah. I mean, there's a period of time for a new product launch where you are buying your customer, your new customers every week. So if in, if you don't have the money to do that, you're not going to be around for very long. That's just a fact of the matter.

Now, there's some other advantages to having that higher price point, too. Some of the advantages to the higher price point, Rob, is it's easier to get a buyer at a major retailer to say yes to a new product that's a premium than it is to a new product that's at a low price. And the reason is simply this, folks. If I'm the buyer at Walmart and I have 40 products in my category and you bring me another product that is kind of a me too product, middle of the pack, and it's in the middle of the pack of pricing, then as the buyer, I'm going to look at that, I'm going to say, well, I'm going to get to take up 4 more square inches of my shelf so that I can trade the same number of dollars across 41 products instead of 40 products. When you go to that buyer and you say, yes, I know the average price point in Your category is $10 and I'm 30. Here's your sales pitch. Your sales pitch becomes, I'm going to take a reasonable percentage of your current $10 customers and I'm going to turn them into $30 customers. Now, you've just expanded the margins, you've expanded the dollars in the category and you've demonstrated to the buyer that because I'm charging $30, I have the money to run an ad campaign that your $10 brands don't have. So I'm going to drive traffic to your store because I have the margins to do it. Now, Rob, you've had experience with this as I've had, but there's another element here that I want people to think about what? About people looking at a product and believing that it's not any good because the price isn't high.

I'm struggling to think of an instance like that. But I know we've overcome the new product trial with things like guarantees. We've had success there. But I think the price often justifies the purchase, if you will. I mean, you obviously have some thoughts on this.

Yeah, there's a perceived value.

If the package lives up to the expensive price tag, there's a perceived value.

So when people are shopping, first off, no consumer goes out to buy the lowest price product. No one, I promise you, no one is looking for the lowest price. Everyone is looking for the highest value. So the more value you can establish, the better deal you are. So you could be in a category where you're a $30 product and everybody is 10. But a certain portion of consumers will think that the $30 product is the best value because it made the best offer, it had the best guarantee. It offered me the deliverables that I was excited about. The packaging looks premium. The packaging looks, you know, maybe it looks pharmaceutical. It looks, you know, very. What other term I'm thinking of? It looks like it's designer ish, whatever the case is.

And when we approach designs for products, at least from the packaging standpoint, we know, we go into the design process knowing, all right, this costs the most in the category, so it needs to look premium. So we're looking at different substrates, we're looking at different print tactics, we're looking at design tactics that make it look justifiably more expensive. So even if the deliverable is exactly the same as the CVS brand, it looks like a brand. It looks like a product that should cost more. So we're trying to overcome some of those things in the design phase of a new product launch. Not to cut you off there, but I think that's what you're talking about there. So we're looking at justification or building value at the shelf level.

And when our product is sitting at the shelf and we go to the store and we're looking at the 20 or 40 different offerings, every product on that shelf is looking for something to differentiate itself from the product next to it. Sometimes the best way to differentiate yourself is your price is higher because the consumer says, wow, everybody is $10 and this thing's 30. Because this is what happens in people's mind. What's so different about this? And this stuff must be amazing if people are willing to pay three times the Price.

And that plays into my two part answer. The product needs to be amazing. It needs to improve someone's life in some way, even if it's, it makes me happier, you know, it. That to me means a product can be charged more money for.

Right. And sometimes that is based on what the product offers, the guarantees, the packaging, the company donates to some cause that I like. The product raises my prestige of how I feel about myself. I mean, this is the reason people buy designer purses. I mean, look at the designer industry. You look at designer purses, what is it that people are looking for? They're buying purses where the whole purse is a logo, it's an advertisement.

I have several of those in my closet.

Yeah, the purse is an ad for.

The designer, not my purse, by the way.

No, no, not. I can answer that. But the purse is an ad for the, for the designer.

Yeah. I mean, to a point. You know, with, with consumer packaged goods, there probably isn't that prestige factor as much because they're not as visible. But that is one of those factors that, that plays a part. But it's to me, if you, if you gave me a product that had superior qualities that could be communicated, and most of them can be communicated pretty easily on a package, I would tend toward a more expensive price.

Because you're looking for the best value.

I'm looking for the best value. I'm looking for the best value, the most, the biggest bang for the buck. It must work. You know, people, people think that way. If it's $30 versus a $3 pain cream, I'm going to assume that $30 pain cream works better than the $3 one. Whether it does or not, I'm going to assume that. And most people are a good percentage of people or will come away feeling like that because they don't want to feel stupid about their purchase.

Now, to expand on that, Rob, something we do here at our agency at Jekyll and Hyde is we really focus on psychology and we use a lot of what referred to as human givens theory and nlp. And here's where Rob's going with this. There is the, there is a process that happens in people's mind which is called a confirmation bias. And what the confirmation bias is, we look for things that will confirm our belief when we go to the store and we buy the $30 product instead of the $10 product. There is a natural bias in us because none of us want to be foolish. None of us want to feel we were taken advantage of. So there's a bias in us that we get that product home and we look for its performance.

Right? Yep.

And we confirm how smart we were.

And that. And that goes back to your purse example. That goes back to, you know, I guarantee you my wife thinks that all of her purses are of better quality than the cheaper purses that you could buy at Target or wherever. And it's part of that is justifying the price to me, but part of it is also making her feel good about the purchase. Why is the brand prestigious? Why is it better? Nike's the same way. You know, I'll spend $150 on a pair of running shoes that I think are better or I believe are better than the $90 purchase.

I think that was just because you always want to employ children in China.

That is 100%, 110% reason. Because they see all of that money. Exactly.

So at any rate, and I'm gonna leave you with two last things. One is when you're, when you approach the market as you're going to be the low price leader, you're only the leader until somebody else comes in with a lower price. And there's always somebody out there who's willing to be crazier than you are and lowering the price. The last thing I'm going to do. And maybe this will jog your memory. Do you remember we had a client years ago that was. They had a CPG product that was for hair removal and it was like a sugaring product.

Yeah, yeah.

When we raised that price, the sales went up and we actually raised that price by $10. And that $10 price increase actually made the sales increase, not just in dollars, in units.

I don't remember changing anything else about approach.

We just changed the price by $10 and the product sold more.

So let me ask a question. How do you advise a client that is already in retail, say, I have a $20 hairspray. I have a $20 hairspray. I'm competing with a group of other $20 hairsprays. How do I go back to the buyer and say, hey, I want to eke out a little bit more money here? How do you advise clients who you're having this conversation with a client, you need to charge more for your product? I've heard this many times. What do you tell that client when they're going back to a buyer?

Here's what. We've done this because we've raised prices on many products with our clients. What you have to do is you have to work with the buyer you have to explain to the buyer the reason we're raising you. Be up front. We know we're a $20 product. We're going to go to 25. The reason we're going to 25 is A, we want to differentiate ourselves from the $20 product. B, Mr. Client or Mr. Buyer, we're going to give you a larger portion of the increase than you normally get. So let's say that you're at a retailer that works at 32 points. I'm going to go to that retailer. I'm going to say you guys are making 32 points on us. I'm going to want to increase my price by 5. I'm going to give 50 of those points to you. I'm going to give you not just 32 more points of margin. I'm going to actually make this even more profitable. And what I'm going to do, Mr. Buyer, is I'm going to take my half and I'm going to invest it in more advertising and marketing so I can sell more products through your store. That's how you get the buyer degree, because the buyer, at the end of the day, the buyer is about, how many people can you bring in the store? How many pieces of this can you sell? How much money can I make?

Profitability per square inch? Yep, that's good advice.

Well, I think that wraps it up for the pricing talk on this one. Again, CPG insiders send us emails, give us phone calls. We're always happy to hear from you. We're happy to answer questions. And if there's a topic that you want us to discuss, send it to us, and we'll be happy to do that, too.

Thanks, everybody.

Sam.