In previous articles, we covered Product and Place, the first two of the famous “Four P’s” which comprise the marketing mix. In addition to formulating effective product development, product life cycle management, and distribution strategies, the finished goods marketer must also consider a third area when outlining a strategic marketing plan, that of pricing. There are many pricing models from which to choose, and there is no one model that is better than another. I recommend a six-step approach, to setting prices:
Step 1: Identify Pricing Constraints and Objectives
Bottom Up: Cost Constraints
Due to the expense of both natural raw materials and processing these ingredients, natural personal care marketers are constrained by elevated costs and therefore limited in how low their price point can be. The first step is to quantify your cost of goods sold (COGS), a figure that encompasses all of the elements that can be directly attributed to an individual product. These variables include raw materials, processing, bottling, packaging, and all production activities/wages involved in making a finished good. This “gross” number does not include overall sales and marketing expenses or general and administrative expenses which must also be considered when calculating cost-per-unit. A final, “net” cost-per-unit can be reached using simple arithmetic. Cost is a primary constraint facing the marketer.
Top Down: The Marketplace
Unless you are a pioneer in a new category, you will be constrained by what competitors are doing within your particular segment and within your chosen channel. Consumers will only accept a premium price (in a competitive category) if the marketer communicates compelling competitive advantages and adequate differentiation from other offerings. Your power lies in a combination of superior product benefits, the marketing message, and the equity in the brand itself. Brands with high awareness, and therefore brand equity, include Tom’s of Maine and Burt’s Bees.
You are also constrained by the channel in which your products are sold. For example, consumers shopping prestige stores are used to paying premium price points for high quality goods. Mass-market shoppers are more price-conscious, and goods in that channel are priced accordingly. The natural channel is more of a free-for-all, with everyday personal care items priced at lower levels and cosmeceuticals priced much higher.
Establish your overall objectives. Are you pricing to maximize profit, as with mature products? Are you more interested in maximizing unit sales or market share, as is appropriate in the introduction phase of the product life cycle? Are you more interested in maximizing sales revenue, commonly implemented when products are in the high growth phase? Or are you pricing for survival in a hyper-competitive marketplace?
Step 2: Estimate Demand and Revenue
At this point you are ready to calculate your sales projections. You must analyze target consumer attitudes and behaviors, the price and availability of other products addressing the same need, as well as a full analysis of the industry segment itself (growth rates, drivers, etc.).
Step 3: Determine Cost, Volume, and Profit Relationships
Anyone who has even attempted pricing strategy knows that the more volume you do, the cheaper each product is to produce. This is largely due to the fact you can spread your fixed costs (overhead, salaries, etc.) over more units, making each individual unit more profitable. The more you produce and sell, the more volume you generate and the higher your total profits. Also, there is a point where the marginal cost of producing a unit equal the marginal revenue you receive from selling that unit. At that juncture your profit margin on each additional unit becomes unattractive, and it no longer makes sense to produce and sell units beyond that point. Know your break-even point!
Step 4: Select your Approximate Price Level
Once you have determined costs and projected revenues and volumes, you can look at employing one or more general strategies. These include:
- Penetration: Offering a product a very low price to maximize market share and volume
- Prestige: Setting a high price for status and quality conscious consumers
- Cost Plus: Summing total unit costs and adding a specific percentage to arrive at your chosen price point
- Mark-up: Adding a fixed percentage to items
- Target Profit: Profitability maximization goals
- Above, At, or Below Market Pricing: Get a subjective feel for how you measure up against the competition
Step 5: Set List Price
This is the suggested retail price (SRP). Fine-tune your SRP to consider all costs, company objectives, channel customs, industry data, and market factors such as competition.
Step 6: Adjust Price
This is the point where you offer “push” discounts such as case stacks, volume reductions, rebates, etc. On the “pull level” you may offer coupons or bundled deals. At this point, you have all the information you need to figure out your profit margins so that you can effectively meet Return on Investment mandates, or adjust price and cost accordingly.
These steps should provide you with an effective framework for engaging in strategic pricing. Pricing natural personal care products is, in some respects, easier than pricing in many other product categories. Products vary so greatly and found in so many channels, that it can be difficult for the consumer to assess value based on price alone. Also, demand for these products tends to be inelastic, unlike most product categories, meaning that when prices rise (or fall) and/or consumers begin to spend less (or more) on goods and services, demand tend to move very little. Regardless, it helps to go through the steps in order to reduce risk and strategic efficiency.
Darrin C. Duber-Smith, MS, MBA, is president of Green Marketing, Inc., a Colorado-based strategic planning firm offering marketing planning, marketing plan implementation, and other consulting services to natural products companies in all stages of growth. He has 15 years of specialized expertise in the natural products industry and is also Visiting Assistant Professor of Marketing at the Metropolitan State College School of Business in Denver, CO, as well as executive director of the International Association of Natural Product Producers. He can be reached at [email protected].