Negotiating a future cost price increase? How elastic is the retail price? When a supplier in a long-term relationship with a retailer needs a cost price increase and the retailer values the supplier, both parties typically speculate about the impact on volume while negotiating. Many times, no one can quantify the retail price change impact, creating more questions than answers during the negotiation. You might think about price elasticity, but how often do suppliers do the analysis to quantify the price impact on volume before negotiating? Price elasticity measures consumer demand and sensitivity to price changes. This is critical data suppliers need to analyze before pushing for a price hike. Supplier proactivity reduces retailer fear and uncertainty when faced with an unscheduled cost increase. This is preconditioning, and in a long-term relationship, it is highly appropriate. The supplier’s analysts should assess and quantify the price elasticity at different retail points. This gives the retailer options. Price elasticity is “the percentage change in volume demanded, divided by the percentage change in price.” Sounds simple, but there are other inputs. External consumer data, pricing psychology, trends (e.g. a shift to private label over name brands), historical retail price/volume data, CPI, and seasonality can all impact demand. The more inelastic the price is (as with essential CPG staples), it is easier to justify the retail price hike knowing that consumers will not change their purchasing habits much. Steps to proactively address elasticity before negotiating: - Determine Elasticity – Create a robust model with disparate data. - Forecast Volume Impact – Predict volume change based on various retail price points. - Segment Your Portfolio – Review product lines and categorize based on elasticity. For elastic products (e.g. luxury snacks), propose smaller price increases or bundles; for inelastic products (e.g. staples), be bolder with the increase. - Predict Retailer Strategies – Use elasticity to predict if retailers can pass along costs by increasing retail prices, or if the retailer needs to absorb some cost to preserve volume. - Plan Preconditioning Communications – Create a communication plan prior to negotiating. If encountering high elasticity, prepare to give concessions to offset any volume drops. If you are a supplier who ignores price elasticity prior to negotiating with a retailer, prepare to be uncomfortable, experience retailer confusion, and not obtain price increase approval during the negotiation. By proactively planning, using facts and data, preconditioning, and creating value through collaboration, you can improve your relationship, mitigate risk, and both parties can ‘win’ (but the better negotiator will always ‘win more’). What other price action challenges do you face? #PricingStrategy #RetailInsights #CPG #BusinessNegotiation #TheGapPartnership
Tanja Mäkynen
1mo
Thanks Brian, very insightful! I’ve personally had some of the most interesting price action challenges in the diaper category: a textbook example of a price inelastic product in an extremely competitive market. At one point, my retailer wanted to lower the everyday price of our market-leading diaper brand to gain share of trade. I put together a single slide showing why, in a declining category (due to declining birth rates) and with inelastic demand, lowering prices would only shrink the pie for everyone. That one slide quickly ended the negotiation. Instead of racing to the bottom, we agreed to protect the value of the category and focus on trading shoppers up. I’d call that a big win-win (some shoppers might disagree though).
Sales Director West & Albertsons Nationally, Conifer Specialties Inc.
1moGreat read!