The (List) Price is Right 6/21/2018
Whether you have one or many brands in your health, wellness and general merchandise CPG portfolio, it’s time to think about list price. When was the last time you analyzed your or your competition’s list prices? Or, better yet, have you ever done this? If the answer is, “it’s been a while” or “no,” respectively, it’s time to get list price considerations into your retail strategy and business planning, since you are likely leaving money on the table.
If a category competitor takes a price increase (or decrease) and you are unaware of the change – and don’t take action for your own brand – this can cost your brand(s) hundreds of thousands of dollars in lost margin dollars based on the time value of money (TVM). TVM is the concept that “money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.” List prices should and can be analyzed monthly to counter this issue and even identify opportunities to increase revenue quickly by simply modifying pricing in real time.
A Case Study in List Price Analysis
When Fleet Laboratories was acquired by San Francisco-based investment firm Gryphon Investors in 2014, one of the new owner's challenges to Fleet management was to optimize its trade pricing.to develop an understanding of price elasticity for its brands across four categories so it could benchmark the manufacturer’s list price, retail price and unit sales vs competitive brands. The goal was to determine if an opportunity existed to improve manufacturer margins without compromising sales revenue or existing market share.
The strategy included conducting a price elasticity study to determine if a list price could be implemented and, if so, by how much and when. This study would also determine the impact of a potential increase in Fleet’s list price on the manufacturer’s margin on an annual basis.
Using proprietary historical and current list price data provided by Competitive Promotion Report, Fleet discovered that it had not taken a list price increase in more than eight years, while its competitors had taken as many as three increases during this same time period. These competitor increases totaled slightly more than 6 percent. As a result, retailers had gradually increased the retail price for the manufacturer’s products in line with their competitors, thereby increasing their own retail margins while reducing revenue for Fleet. The new list price analysis showed that Fleet had an opportunity to increase its list price 3 percent to 8 percent depending on the brand and category (they reviewed multiple OTC categories at once).
Based on the insights uncovered, Fleet successfully implemented a 5 percent price increase across the board within three months after the list price analysis was completed. Not only was there no negative impact on unit sales, sales revenue or market share from the price changes, but the incremental manufacturer margin dollars that resulted from implementing the list price increases were $2.5 million annualized, which generated significant ROI on the list price analysis study and ultimately helped offset cash spent by the investment firm on the acquisition.
What’s more, using this tactic and other measures, Gryphon Investors was able to improve the company’s financial performance and sell the business for more than twice its original purchase price just two years later – a win-win for everybody!