Source: https://www.flickr.com/photos/inggroup/25397449183

We were meeting in our wood-paneled boardroom. I was part of a broker team hosting business planning sessions between a major Northeastern supermarket and a few dozen of our CPG manufacturer clients.

During one session, a large beverage manufacturer suddenly announced that they were going to drastically cut the depth and breadth of their discounts. To put it mildly, this announcement went over like a bomb. There may have been some screaming and cursing.

It seems this manufacturer had a bad year, and so management wanted to cut back on discounting in order to boost margins.

Unfortunately, they had missed some important points.

They were focusing entirely on their internal financials. They did not consider the supermarket’s goals, one of which was growing their share of the manufacturers’ discount spending, also known as trade spending. There might have been an opportunity to work together on mutual goals. And most seriously, they did not consider the consumers’ perspective.

For most of my clients, discounting is used to improve volume, and plans rarely change from year to year. It is a brute-force tool.

Compared to those clients, this beverage supplier had the right idea. But though it’s tempting to use price cuts to improve volume, it can leave money behind if the market is willing to pay higher prices. This supplier simply wanted to reduce their discounting — a worthy enough goal, perhaps, but without the right tools to present their case. And with the right support, they might have been prevented an important customer from screaming at them.

When I work with clients in similar situations, I use a range of specialized tools to help them understand their consumers’ willingness to pay for their products. Here are the three tools I use most often:

1. Price waterfall: assesses the current situation and whether there is any leakage. What margins are earned at various points in the value chain, and how much of a role does discounting play?

When I conducted this analysis for one manufacturer, it was shockingly clear their internal margins were almost non-existent after accounting for all of their trade expenses.  Trade spending was crowding out nearly all opportunity to earn a profit.

In other versions of this chart, additional expenses like allowances for spoils, cash payment terms, and others can be included to provide a more comprehensive view.  

The price waterfall chart served as a useful internal communication tool to visually demonstrate where margin might be leaking.

2. Van Westendorp: assesses consumers’ willingness-to-pay. What is the range of acceptable prices? What are the minimum and maximum acceptable prices?

One of my clients typically discounted from $2.99 to $2.19 or $2.29. Many of their retailers demanded a minimum 20 to 25 percent discount, which is why those price points were selected. But we found that consumers were just as willing to pay $2.49 on sale, and one field experiment actually showed higher volumes at $2.49 than $2.29. The retailer made an exception to allow a lower discount on promotion, and everyone earned more dollar margin and we demonstrated that volume could actually grow.

In other words, I helped my client develop a comprehensive selling story that made for an appealing scenario that resulted in a reasonable request to their trading partners.

3. Conjoint: evaluates various product attributes: How much do consumers value different product attributes, and how does that translate into the price they are willing to pay?

By using this complex research technique, we can learn how consumers assign value to various attributes. This chart is a small snapshot of the output available from conjoint research. Ultimately, this research can result in a model that allows you to mix-and-match product attributes to create complete product concepts, balanced by different price levels, that allows you to see the impact on consumer preference and willingness-to-pay.

One of my clients used this technique to redesign their entire product line, resulting in a new lineup of product sizes, product contents, and — of course — evidence-based price levels that could be defended in a meeting with their retail buyers.

* * *

At the end of the day, discounting is just one tool in your pricing toolbox. There are plenty of others you can add to the collection.

It’s easy, even tempting, to rely on discounting, as it can have an immediate impact on volume. But there’s the danger of leaving money on the table and training your consumers to buy at lower prices. No one ever wins when prices spiral to the bottom. Instead, you need to equip yourself with accurate, compelling, consumer-driven information to ensure you earn the price you deserve. 

Alex Lee, longtime president of OXO, the maker of well-designed cooking tools and housewares, told the story of how they created their iconic liquid measuring cup.

No one had ever seriously complained about measuring cups.  Some people thought that glass ones are too heavy and that they tend to break, but that was really it.  OXO started to study how consumers use measuring cups and noticed one striking commonality that was more impactful. It’s something you’ve probably done yourself at some point.

Photo source: http://www.cas.muohio.edu/scienceforohio/Jello/L.html

Do you see it?  Using a traditional liquid measuring cup, you need to lean over to read the measurement.  It’s annoying, But we thought it was normal.  Well, we did think it was normal until OXO designed a better way: a measuring cup you can read from the top, with no leaning over required.

Photo source: http://flickr.com/photos/jisou/512193478/

This new measuring cup sold two million units (!) in the first year.

This is a powerful idea: studying how consumers behave can transform your business.  I apply this maxim to pricing research, a topic that has been popular with a number of my clients.

When thinking about how to suggest a retail price, many brands, both big and small, start with their cost.  Then they add on the profit they want to earn, account for expected distributor and retail margins, and get to a suggested retail price.  Or someone suggests a key price in their category and they go with that.

But it’s critical to take the consumer’s point of view into account and understand her willingness-to-pay.

There are three approaches I rely on:

1. Engage with your retailer’s buying team
2. Observe what’s happening in the market
3. Use surveys to ask consumers about price directly

1. Engage with your retailer’s buying team

The team at your retailer customers might have some research or other experience in understanding their shoppers’ willingness-to-pay.  Ask them.  When you have a review meeting or some other opportunity to talk, ask what they are hearing.  Keep in mind, though, that many buyers are biased toward always lowering prices, even if it means that they lose penny profit.

One client of mine faced significant cost pressure, but the client’s largest customer simply would not accept a price increase.  We probed to understand her resistance, and she showed evidence that products in her portfolio suffered large declines in velocity when they were priced above $1.99.  We suggested a smaller pack size that could hit the magic $1.99 price point and make money for my client. She accepted the proposal, and this arrangement worked for everyone.

2. Observe what’s happening in the market

Competitive benchmarking: Where are your competitors priced, and where do you fit on the continuum?  Are you priced comparably to competitors whose products realistically compare to yours?  Are there any magic prices that are working well or toxic prices that are failing miserably?

Natural elasticity: if your product sells at different prices at different retailers during different weeks, or at a discount during a price reduction, measure the effects. Equivalize sales across retailers by measuring units sold per store per week (or per million dollars of store ACV), and see if one price works much better than another.  For a frozen food item, I once found that promoting it at $2.49 produced better unit movement than at $2.29.  It was a no-brainer to make the change.  You can obtain this data directly from your retailer customers or from syndicated data sources like SPINS, IRI, and Nielsen.

3. Use surveys to ask consumers directly about price

There is a wide range of tools available to affordably survey consumers about their willingness to pay for your items and other topics.  I have found Google Surveys to be very affordable for certain use cases, as low as 10 cents per response for a single-question survey.

From easiest to hardest, some pricing survey techniques include:

• Gabor Granger: Identify the highest acceptable price by asking about purchase intent at multiple price points.
• Van Westendorp: Identify bounds of acceptable price ranges by asking what prices would be too cheap, cheap, expensive, and too expensive.
• Conjoint: Identify utilities of product attributes, including price, by having respondents choose from among multiple product/price combinations.

* * *

Ultimately, the most important thing is to get inside your consumers’ heads.  Any technique you use to get there will involve a wide range of trade-offs, but it’s important to start somewhere.  And the evidence you learn to support your objectives will go a long way toward building trust with your retail buyers, sales team, and beyond.

(You can see a video of Alex Lee’s presentation that inspired me on the Gel Conference’s Vimeo channel.)

Contact Scott if you’d like help thinking about your products’ prices — and how your customers perceive them.

A version of this post originally appeared in Specialty Food Resource’s Food Entrepreneur Magazine.

Some people believe all Universal Product Codes (UPCs) contain the number 666, representing the number of the beast or the anti-Christ.

Snopes cites the relevant Bible verse: “No one could buy or sell unless he had this mark, that is, the beast’s name or the number that stands for his name” (Revelation 13:17-18).

In a story on UPCs and this theory, The New Republic quotes from Revelation, which discusses the End Times:

“He forced everyone, small and great, rich and poor, free and slave, to receive a mark in his right hand or in his forehead, so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.” What is that number? “Let he that has wisdom count the number of the beast, for it is the number of a man, and his number is 666.”

As interesting as this sounds, it stems from a misinterpretation of the bars that appear on UPCs. They were interpreted to read as 666. But in reality they are just separating marks or guide bars, which look like the bars that represent sixes but are slightly different and have no numeric meaning.

Scanners read the width of the bars and the gaps between the bars in a UPC to convert them into a number that represents the product.

I’ll describe the UPC-A version of the barcode, which is used in the United States for most retail products. Other types of barcodes exist for some product categories, like books, and in countries outside the United States.

Number system digit: This number determines the product’s category.

• 0, 1, 6, 7, 8: Most products
• 2: Products sold by variable weight, such as produce and meat; determined by individual retailers or warehouses
• 3: Pharmaceuticals sold by National Drug Code (NDC) number
• 4: For retailer use; indicates loyalty cards or store coupons
• 5: Coupons
• 9: Reserved

Manufacturer code: This set of five numbers is assigned to a manufacturer by GS1, a nonprofit that governs the assignment of U.S. UPCs.

Product code: The manufacturer determines this set of five numbers; it can be any code the manufacturer desires.

Check digit: This number is determined by a formula. The scanner calculates this formula on its own and then checks against the numbers it scanned to determine whether it scanned the correct digits. If there was an error—say, due to a smudge on the package—the check digit won’t match, and the product will scan with an error.

Note that the information conveyed only identifies the manufacturer and the product.  No pricing or other information is provided. At a retail location, the register will look up the product information and cross-reference it to find the right price or any other information. There are no series of sixes or any other information included in a UPC that can somehow personally identify a shopper. Furthermore, these codes have not been affixed to people, as some have feared.

Some other notes and resources:

1. Using UPCs in syndicated data like Nielsen and IRI: I usually look for the 10 digits represented by the manufacturer code plus the product code. Most U.S. products that I’ve worked with start with a zero as the number system digit, and those leading zeroes are omitted by Nielsen and IRI. There have been a few instances where I have worked with products that contain a non-zero number system digit, and one must be careful to include those digits when searching.

2. If you need to obtain UPCs for your products, talk with GS1. There are some UPC resellers who can sell single UPCs, but that will make it hard to do business with anyone but the smallest of retailers.

3. Wikihow has a good tutorial on UPCs, and Keyence can help you decipher the bars in case you don’t trust the numbers printed below them.

Ketchup wars! Mustard wars! It’s a Condiment Armageddon! And it’s also an analytical opportunity.

This spring, Heinz relaunched its mustard with a new, improved formulation to compete head-to-head with French’s, the category leader. Answering this shot across the bow, French’s launched a new ketchup, challenging Heinz’s leadership.  At least two publications have called this situation a “war” — presumably between a pair of rival condiment nations.

Over the last 12 months, Heinz’s mustard’s $10 million in sales represents a 300 percent year-over-year increase, while French’s new-to-the-market ketchup grabbed about $3 million. Looking at each brand’s mainstay product, Heinz’s ketchup is up three percent, while French’s mustard is down 3.9 percent. That might point to a clear winner and loser in the great condiment skirmish of 2015, but I think broader trends say they both may end up being losers.

In recent months, Fortune (“The War on Big Food”) and The New York Times (“Small Food Brands, Big Successes”) have pointed to the proliferation of small brands.  Boston Consulting Group analyzed this shift, showing that large food companies lost 2.3 share points to smaller ones from 2009 to 2013 and another 0.7 points in 2014.

So how do we account for entrepreneurial brands in all of this? Well, hiding in the data, there’s the ascendancy of “all other.” And that’s a group that entrepreneurs know well. After analyzing the top brands in a category, there’s always dozens of others that make up the long tail of results — usually ranging from a few percent to maybe 20 percent of the category’s sales.  In my analysis, there’s never enough space to list them all out, so they get collapsed into an “all other” grouping. But that’s where the momentum and innovation often resides, waiting to break out.

In condiments, there’s share dominance by the big guys. The top three brands in ketchup make up 97 percent of sales, and the top six brands in mustard make up 83 percent.  Aside from those, no other brand represents more than two percent of sales in ketchup and mustard.

But Ketchup grew $21.1 million (+2.6 percent) this year.  We can attribute 74 percent of that growth to Heinz, 15 percent to French’s, 9 percent to private label, and 6 percent to all other brands. (This doesn’t add to 100 percent because of two medium-sized brands that declined.)

In mustard, it’s even more striking.  The category grew $2.0 million (up 0.5 percent).  Many brands declined, and others grew at rapid rates. Gainers picked up $10.8 million, and declining brands lost $8.9 million.  French’s was one of the notable decliners, dragging down the entire category.  Meanwhile, Heinz’s gain was 3.85 times of the category’s growth, and the “all other” segment added 1.37 times more than the category’s growth, drawing from brands like Inglehoffer, Maille, Boar’s Head, and Annie’s Naturals, one of those entrepreneurial brands that is starting to see significant scale.

Even more telling is that this data set also doesn’t account for the natural and specialty channel, which has an even greater assortment of small brands (such as Tessemae’s and Sir Kensington’s) — and I suspect, even for the graying condiment category, some trends are starting in that channel and migrating to conventional grocery outlets. My local Shaw’s and Star Market stores have been increasing assortment of specialty products, and Target has an initiative to do the same, both in terms of bringing on new brands and co-developing sets with emerging product partners. (Hey, I loved finding Intelligentsia Coffee at my local Target last week!)  In these cases, there is no doubt smaller brands are stealing shelf space — which is eventually going to translate into share.

I often hear from folks in the food industry who have an idea to make something better.  These have included colleagues who wanted to improve baby and toddler nutrition, make tasty yogurt with better health attributes, bring Asian snacks to an American audience, and more. Most of them are still in business and thriving.  And while they (mostly) aren’t becoming big businesses, they are providing livelihoods for their owners and employees. Some have broken out; more will.

Consumers — particularly Millennials — are reacting to this demonstration of authenticity and are enjoying the newfound availability of novel products on shelves where they shop.  And they pay premium prices for this benefit.  In some cases, the premium isn’t much in dollars and cents, and consumers are willing to make the trade.

In other cases, larger premiums simply mean that new-age products are treats or consumers set aside larger budgets for packaged food than older generations have.  But in all cases, it’s leading to category growth at the expense of entrenched brands.

Among the headlines of wars among the big players in the food business, be sure to look for the hidden story of what’s happening with smaller brands.  If recent history is any lesson, there are some great stories that are waiting to spread.

Reposted from Project NOSH.  Thanks to Jeff Klineman for his editing and for allowing re-use.