Why you need to move away from cost-justified pricing – and how to do it

The COVID-19 pandemic triggered a wave of commercial, economic, and supply chain disruption across the globe. As a result, production costs surged, and delivering products became a lot harder.
To mitigate that disruption and stay profitable, most organisations embraced cost-justified pricing. They simply raised their prices in line with their costs, passing the impacts on to buyers.

Cost-justified pricing is a strong short-term strategy. But the problem is, the long-tail impacts of the pandemic – and the economic downturn it triggered – aren’t going away.

According to data from Bloomberg*, many of the world’s largest FMCG companies have seen significant margin growth between 2022 and 2023. But for most, margins still haven’t returned to their pre-pandemic levels.

The World Uncertainty Index** continues to fluctuate in a way never seen before. Global Consumer Confidence Indices are around 1.5x more volatile than they were in the 1980s**. And inflation shock has driven huge shifts in consumer preferences, buying habits, and spending power.

Cost-justified pricing has been an important strategy for helping organisations mitigate the impacts of this disruption. But as disruptive forces persist, teams can’t just keep bringing prices up across the board. Instead, they must move away from cost-justified pricing, and develop more targeted, insight-driven pricing strategies.

Start by taking a step back and de-averaging pricing

There’s nothing fundamentally wrong with raising product prices in line with rising production costs. It’s a perfectly logical strategy that’s driven revenue growth for decades. The problem lies in how companies apply cost-justified pricing at scale.
Blanket price increases across every SKU are fuelling negative sentiment among consumers. The longer these price increases continue, the more they begin to translate as corporate greed – or so-called “greedflation”.

That’s a particular challenge in the US, where many manufacturers have continued to raise prices long after inflation and materials cost increases settled down . Because so many consumers tolerated and simply absorbed these price increases, manufacturers had little incentive to stop raising prices.

But, the organisations that have followed that strategy have ended up losing out on a lot of long-term value and potential revenue growth. These blanket price-increasing strategies ignore and overlook local opportunities. It’s not just about understanding customer needs in areas where they may be more price sensitive – it’s also about making the most of granular local opportunities to drive revenue growth.
Instead, teams need to make more targeted and granular pricing decisions. They need to apply pricing increases across SKUs and geographies where elasticity is at its lowest and higher prices are likely to be better tolerated by consumers. Or, to put it slightly differently, they need to de-average their pricing strategies.

Make informed local pricing decisions to drive global revenue growth

To de-average pricing, you need a granular understanding of all your elasticity drivers across all the regions in which you operate in and sell into . That requires two things: timely and accurate data gathered from across your markets, and deep analytics capabilities to help make the data visible and actionable.

In Europe, conditions are often completely different between individual countries, which makes it tough to build a consistent data view across the region. But no matter where you operate, you need to create a consistent data foundation that spans your operational footprint to gain a clear and complete view of elasticity.

Unfortunately, looking at elasticity alone isn’t enough. Integrating deep competition analytics can help you understand your cross-elasticities across true price competitors, substitutes, and categories.

You’ll also need capabilities that can help you understand the decomposition of your elasticity, so you can start to see exactly how the pricing actions you take – and those taken by competitors in response – will impact buyer behaviour.

With all those capabilities in place, teams can stop making assumptions about individual SKUs and markets, and start making confident, informed pricing decisions for each of them that maximise revenue without driving consumers away.

Understand your pricing power and maximise revenue growth everywhere

Together, the capabilities we’ve explored can help organisations maximise revenue growth in times of economic disruption and reduce consumer spending power.

With a decomposed view of elasticity, teams can understand their true pricing power. At a glance, they can see where they have the opportunity to raise prices without upsetting consumers or damaging retail sales. By aligning pricing strategies with varying levels of pricing power across their portfolio, RGM teams can overcome nearly all the pricing challenges created in the wake of the pandemic.

In our next article, we’ll explore how those same teams can take things a step further and strengthen their promotion strategies by putting themselves in retailers’ and consumers’ shoes.

In the meantime, you can view all the recommendations from our recent global RGM study here. Or, if you’d like to learn more about XTEL’s platform-based RGM approach, and see how it could help your team optimise pricing for maximum revenue growth, contact us.

3 steps to move away from cost-justified pricing

1. Use deep analytics to build up a granular understanding of all your elasticity drivers across all the regions you sell into.
2. Augment that insight with a clear view of cross-elasticities across competitors and categories, and capabilities that can help you understand the decomposition of your elasticity.
3. Use your decomposed elasticity view to model pricing changes and start making highly targeted local pricing decisions that drive global revenue growth.