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Report: How to Gain Margin Growth With Collaborative Pricing

In today’s promotional world, though price still plays a major role in a manufacturer’s positioning and, ultimately, its value proposition, many are losing control over the price shoppers pay for their products.

A new study by market research firm IRI titled, “Drive Margin Growth 1 to 3 Percent with Collaborative Pricing Strategies,” found that retailers aren’t leveraging price strategically.

“As many large retailers continue to grow their own pricing capabilities, compliance to manufacturer suggested list prices is eroding,” the report noted.

And as a result, the capabilities retailers have developed could be relinquished in favor of simply finding ways to raise prices to meet margin goals.

“This, in turn, leads to prices not only falling outside of the ranges manufacturers suggest, but even shifting, inconsistent competitive price positions among major brands,” according to the report.

But fostering true collaborative relationships with manufacturers is one way retailers can see improved price realization.

A one percent improvement in price realization, for example, can deliver $10 million in increased profits for every $1 billion of annual sales, which, as IRI notes, surpasses the impact of a 1 percent improvement in cost of goods sold or even operating costs.

“While manufacturers cannot have direct control over retail prices, smart manufacturers have learned to turn their detailed category and full market knowledge into insights that allow them to adeptly take on the role of a strategic advisor to retailers,” the report noted.

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Manufacturers should be able to advise retailers on things like category plans, long-term strategies and visions, and also have holistic discussions about pricing. And if those conversations can happen, those manufacturers will lead the way in achieving gains in price compliance and margin, and they’ll also have more insight into how retailers are growing their respective categories.

In the apparel world of yesteryear, retailers leaned on the pricing expertise of their vendors and often kept with the manufacturer’s recommendations, but today, manufacturers’ influence has waned and retailers have made shifts in price per volume either through direct price increases or by moving to products and pack sizes that have higher per-unit price points.

Retail prices have risen, but they are increasing at rates in excess of inflation and manufacturers have not felt the gains. For some manufacturers, according to the report, prices have remained consistent since 2011 but costs have risen considerably in that same time.

“Partly, this is due to larger retailers taking advantage of increased leverage as smaller manufacturers drive greater competition for shelf space, but carryover habits from the Great Recession have also led manufacturers to hesitate on overdue price increases,” the report noted.

So what’s hindering optimal collaboration between retailers and their manufacturers?

A lack of the right kind of communication, really.

Manufacturers will have to understand what the retailer wants to achieve, what obstacles it faces and how different categories will contribute—and if the manufacturer goes about it in a way that expresses a desire to grow the category rather than pad their pockets, they may be surprised how often interests will align when the goal for both parties is to better the business.

“Success hinges on the ability of a manufacturer to articulate and work within a retail category vision and series of objectives, making pricing recommendations that fit within that overarching framework in a way that meet individual retailer needs just as much as their own,” according to the report. “Whether they do this centrally or dedicate local teams, CPG manufacturers must adapt their approach to collaborating with their retailers to establish their rightful position as a necessary source of pricing guidance and information.”