High inflation, bullish raw material markets and a consolidating retail landscape are a devastating mix leading to the aggravation of historically grown, unexplainable price differences across countries. Those price inconsistencies entail a major commercial risk for FMCG manufacturers since margins of retailers are also under pressure. In search of keeping their margins healthy, retail buyers are leveraging parallel trade, buying groups or even legal actions to find cheaper alternatives in other countries. Recently we have seen several cases where manufacturers lost millions due to unexplainable regional price differences.
Therefore, we strongly recommend to pro-actively manage this price exposure risk and to install a consistent price and discounting structure across countries. To do so effectively, we typically follow a 4-step approach:
1. Remove outliers
Step one, immediate action: avoid obvious exposure risks. Eliminating outliers can be implemented in the short-term even when comparable price definitions are not yet in place. Take the most comparable price level across countries and try to raise all prices below the ‘25th percentile’. Besides, also investigate the prices above the 75th percentile for larger volumes, as those deals represent substantial price exposure risks when joining forces with retail players below the 25th percentile. Especially in the case of large price spreads, those immediate corrective measures will help to avoid margin losses due to inconsistent regional price differences.
Figure 1
2. Install a uniform price structure
We often observe that prices are set in a decentralized manner with local discount structures leading to incomparability across countries. As a result, local teams have no clue how their price decisions are influencing regional price exposure risks. Therefore, it is key to develop a uniform price structure. This way price, differences between countries can always be explained. We also see this as an opportunity to structure strategic guidance in an effective way and reflect on country, channel, category and product pricing tactics as shown in figure 2.
Figure 2
3. Set value-based RRP’s
Recommended retail prices (RRP’s) are a key starting point in the uniform price structure. Although FMCG manufacturers are not allowed to impose those prices legally, it is important to reflect on the willingness to pay and on the position versus competition. Both will differ per subregion and as such conscious price decisions are required to optimize prices while keeping the price differences explainable. We recommend setting RRP’s per cluster of countries and link the RRP logic to certain anchor products. It avoids overcomplicating things and forces to reflect on the product portfolio structure.
4. Establish conditional discounts
Although regional RRP’s are an important element of a regional and value-based pricing approach, the majority of unexplainable net price differences are generated by local pricing policies . A high degree of local autonomy allows sales teams to capture local opportunities, however without the right level of central guidance, they drive unexplainable net price differences over time. On top, legacy agreements often become an acquired unconditional discount for buyers, provided without any counterpart. We advise to install a conditional discounting system linked to strategic objectives (see an example in figure 3). This way, the right customer behavior is stimulated and specific activities in line with the growth plans are rewarded.
Figure 3
Once the uniform price and discounting structure is implemented across countries, it is important to establish a central governance process. Market dynamics are changing faster than ever, consequently a regular review of the RRP’s and discount effectiveness is recommended. Luckily, pricing technology has evolved drastically over the last years. A large part of the monitoring and optimization processes can be automated easily, reducing the workload to maintain regional price differences under control.
About the authors
Dries Debbaut and Bert Vandewiele are Managing Partners at Chronion
Pauline Stas is Senior Consultant at Chronion
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