Most consumer products companies and retailers are testing how consumers respond to price increases in real time – and the results often give them the green light to boost them.
Say soda manufacturers face steep increases in costs. Say that the company wants to increase the price of a 12-pack to cover those costs, but without putting a dent in sales. Instead of making Hail Mary, it tests a few different prices. The price rises to ten dime in a couple of shops. Everything else rises to about a quarter. Maybe it will lower the price in some stores.
We’ll have to wait and see what happens after that. If demand changes slightly at the highest price, thousands of stores may decide to roll out the new price.
Welcome to the world of real-time pricing testing. Coca-Cola, Frito-Lay, Hershey, Neutrogena, Walgreens and JCPenney are consumer products companies and retailers that are experimenting with price fluctuations to determine how high they can go before turning off customers and losing sales.
“Everything is a test all the time,” said David Moran, cofounder and president of Eversight Labs, a provider of pricing technology.
While companies have always been able to run small tests before pricing changes, advances in technology now allow them to run tests in a handful of locations and optimize prices per item in their product portfolio in thousands of stores.
That type of real-time data comes in handy at a time when consumer behavior is too hard to predict between the global epidemic and inflation at a 40-year high. Typically, companies look at how consumers have reacted to price increases in the past and try to predict how they will react in the future. They want to be careful not to raise prices so sharply that sales are noisy. However, data from previous years can be thrown out the window these days.
“Historical information is irrelevant right now,” said Farla Efros, Managing Director of HRC Retail Advisory at Accenture.
According to historical data, consumers should react more negatively to price increases. However, consumer products companies that make snacks, drinks, cleaning supplies and other household goods are saying that consumers are receiving more than they expect. Last month, Procter & Gamble says that elasticities – which measure how much demand for a product falls when prices go up – are still 20% to 30% better than historical data.
“Despite all the jaws of consumer demand softening or customers going back, we don’t see it in the data,” Moran said. “It’s a little confusing.”
Moran has an eagle’s eye view. They help set prices for some of the world’s largest companies that make cumulative $ 80 billion in revenue. When they began to notice that prices were rising last summer and consumers didn’t seem to care, they wondered if there was anything wrong with the data or the company’s algorithms.
He commissioned a team of “very expensive” Silicon Valley data scientists to investigate, throwing too much manpower into the task, which added several years of full-time work in a matter of months. To better understand what’s going on, they manually reviewed the results of each elasticity for a grocery store client.
His conclusion? “It’s not a failing algorithm. I’ve checked to the nth degree,” Moran said.
If consumers continue to show that they are willing to buy the same items even when the price is high, it will essentially give companies real-time permission to charge more. If the customer interrupts the price increase, the company may decide to withhold the price increase.
Some retailers have noticed that a portion of their customers, especially those with lower incomes, are pinched by inflation and adjusting their spending. For example, Walmart noted that some consumers are switching from whole-gallon milk to half-gallon and buying more private label versions of lunch meat and bacon.
Eversight’s technology can take that into account. Depending on the feedback it receives in stores, it may be advisable to reduce the price of essentials such as milk and bread, where consumers are more sensitive to price changes. It is recommending to many companies to increase the price in the brand-name version to make the prices of private-label products more affordable.
The adoption of real-time data is accelerating, helping drive a 62% increase in sales on Eversight last year. Moran said companies that use its technology can generally increase their revenues by 1% to 3% and gross margin by 2% to 5%.