How brands can battle inflation with revenue growth management

Headlines continue to highlight the impact of inflation on consumers. It is true we have seen record levels of price increases on the shelf at retail, with brands making three to five price increases over the past two years. Yet, what’s not often publicized is that inflation is disproportionately affecting retailers and brands as well. Consumers aren’t feeling the full effects of inflation as much of the increased costs are buffered by margin compression from retailers and brands.  

The producer price index (PPI) continues to outpace the consumer price index (CPI), which means brands are scrambling to find prices that consumers will accept while offsetting the rising costs related to labor, shipping, fuel, energy, and other raw materials. Often brands and retailers cannot pass along the full cost increases they face, resulting in lower profitability and requiring alternate cost-cutting measures. Revenue Growth Management (RGM) is a critical strategy in the cost reduction and profitability journey. 

Besides inflation, RGM provides holistic capabilities to address other factors at play. The retail business is more complex due to an omnichannel focus. With the acceleration of e-commerce, Retail Media Networks are exploding, and retailers are demanding higher levels of investments and resources from brands to support their e-commerce growth, resulting in more competition for investment dollars. Price, trade and mix are interdependent, and each can have a significant impact on the other. RGM has five pillars: pricing, promotion effectiveness, mix management, trade architecture, and innovation using an RGM lens. To fully optimize revenue and profitability, capabilities and tools must be leveraged across all five. 

As brands settle into the ‘new normal’ of significantly higher shelf prices, there are unanswered questions about current pricing and if it’s the right price point to optimize sales and profit. There are three main RGM levers to help with strategic pricing, including a pricing landscape assessment, consumer willingness to pay research, and price elasticity modeling.   

It’s imperative that brands understand what has happened with their pricing in the past few years. Just because a certain price increase was passed to the retailer doesn’t mean that it was reflected at shelf. Some brands have found that while they may not have implemented a price increase, the retailer increased shelf prices when category competition moved first. Others see higher or lower than expected price increases at shelf.  

To make the analysis more manageable, we recommend focusing on the top ten retailers that make up 85 percent of your trade dollars. Once you understand your pricing, price gaps to competition, and your performance at each of these retailers, then you can conduct consumer research around willingness to pay. We recommend leveraging AI/ML in your pricing research to combine the three main techniques: Gabor Granger, Van Westendorp, and Newton Miller Smith. Once the consumer answers the iterative series of questions, the output consists of optimal price/quantity revenue curves to help understand psychological price cliffs and price levels where a brand would see various levels of unit declines.  

Understanding the pricing landscape 

We conducted a study for a premium brand concerned about their price gap with competition. They needed to increase prices to account for significant raw material cost increases but didn’t know how the consumer would react. Their ‘willingness to pay’ study showed that a line price increase would not be the best strategy. Instead, it was better to increase the smaller item and hold the larger item flat. On the left, the smaller priced item had plenty of room to increase price in the consumer’s mind, while the larger sized product on the right shows that if they increased price by even one cent, they’d lose around 35 percent of the optimized volume by exceeding a psychological price cliff at $6. Understanding the pricing landscape of your brand and competition and combining it with the consumers’ willingness to pay can help make more strategic decisions.  

Once a brand understands the landscape and the consumer’s perspective on pricing, then elasticity modeling becomes an important addition to the analysis. Simulating the impact of price changes at a specific retailer will help understand where pricing changes could enhance brand and retailer profitability and identify where they may be leaking market share due to excessively high prices. 

Retailers expect brands to look outside of just pricing to help offset rising costs. In a Retailer Confidential survey completed by Acosta Group in September 2022, a leader at a large national retailer said to aid in cost reduction, they’d like to see brands have “more focus on growing the core and less around massive SKU proliferation. Most new SKUs don’t end up lasting, which causes a lot of unnecessary costs throughout the supply chain. CPGs need to focus on reducing costs in their own supply chain rather than continuing to drive inflation.” 

Leveraging RGM’s Mix Management lever can be extremely helpful to prune unnecessary SKUs and shift the portfolio mix to highlight cost savings opportunities and drive more profitable sales. In many of the analyses we’ve done, somewhere between 30-to-40 percent of items contribute only eight-to-ten percent of profit. Analyzing the entire portfolio based on item role, profitability, sales, and distribution levels often identifies opportunities in the portfolio, and Acosta Group recommends doing this analysis at least once a year. 

Pricing and Mix Management are two RGM levers that can help brands during this inflationary environment. These analyses can identify opportunities to improve profitability through pricing or assortment and identify areas where cost reduction is needed. RGM is a crucial strategy because it allows brands to optimize pricing, assortment, and promotions to maximize revenue and profits. By leveraging data analytics and consumer insights, brands can make more informed decisions and stay ahead of the competition. RGM requires cross-functional collaboration and change management to build capabilities and leverage analytical tools. Even brands without comprehensive RGM tools and capabilities can begin to leverage the principles shared here to better navigate the inflationary and recessionary environment.  

Julie Oxner 

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Julie Oxner is SVP of Business Intelligence at Acosta Group. Acosta Group is a collective of the most trusted retail, marketing and foodservice agencies empowering brands and retailers to win in the modern marketplace. By delivering transformative, commerce-focused solutions and more than 95 years of expertise, Acosta Group connects brands with people at every point in the consumer journey. Comprised of Acosta, CORE Foodservice, Mosaic, Premium Retail Services and ActionLink, Acosta Group understands and anticipates evolving consumer needs, fueling accelerated performance to connect tomorrow’s commerce today.