How Low Sould You Go?

Michael R. Reopel
Laura Gurski
Jeanne-Mey Sun

Some would say it’s a Wal-Mart world. But trying to “out-Wal-Mart” Wal-Mart on price can have serious repercussions. Pressure builds, not only on retailer margins, but also upstream in the value chain as consumer packaged goods (CPG) manufacturing margins are threatened by increasingly aggressive retailer demands for trade allowances and promotional funds or an everyday low cost.

And the lowest price is not always the right one. When CPG companies and retailers struggle to compete head-to-head with discounters on pricing and promotions with the likes of Wal-Mart, their profits typically fall. But the right prices can reinforce retailer positioning and allow CPG companies to meet end-consumer demand for a variety of products, sizes and features.

In their quest for appropriate pricing, both manufacturers and retailers have powerful, underutilized tools: pricing, promotions and assortment optimization. And retailers and manufacturers are increasingly working together to use these tools more effectively. While retailers control the price to the end consumer, they cannot be expected to understand each of the many categories in their stores with the same level of insight and precision as the CPG manufacturers whose core business it is.

Today, plentiful data and sophisticated software tools have made it possible to eliminate much of the guesswork about the right price, promotion and assortment. Best of all, optimization can benefit retailers and CPG companies alike if they commit to cross-value chain collaboration and to institutionalizing the required capabilities. Such collaboration and capabilities are currently considered key strategic advantages. But within a few years, they will be a standard part of the competitive toolkit.