Magic pricing back in focus as raw material costs rise

While FMCG majors HUL and Nestle have already implemented price hikes across their daily-use products, Dabur and Parle are expected to follow suit.

The demand for packaged goods in rural India, slowed down for the third consecutive quarter in January-March 2022. So, the consumers switched to smaller packs, amid steep inflation, revealed research firm NielsenIQ, in its quarterly update on fast moving consumer goods (FMCG).

Retail inflation surged to an eight year high of 7.79% in April. With increasing inflation and raw material costs spiking, FMCG brands are working on increasing prices of products. But with that comes the magic price conundrum. Does a brand increase cost from a magic price like Rs 5, Rs 10 or Rs 15 or reduce quantity and maintain the magic price?

When faced with high inflationary pressures, especially in markets like India, where people are extremely sensitive to prices, FMCG players face the challenge of maintaining convenient price points.

Apart from inflation, the growing environmental concern has also added to rising costs of production for packaged products. The recent plastic straw ban (effective from July 1, 2022) and the unavailability of any cheap alternative, poses massive costs challenge for companies like Dabur, Coca-Cola, Parle Agro and PepsiCo that sell about 60% of their fruit juices in small tetra packs.

For FMCG brands, products available at small price points (Rs 2, Rs 5, Rs 10 and Rs 20) make a big part of their sales. These price points are essential, especially for the lower and middle class families, who have to stick to extremely stringent budgets for their daily needs.

The bulk of FMCG sales happens through single-use, small serve packs, from neighbourhood grocery or kirana stores. Business strategist and marketing expert, Lloyd Mathias says that convenient price point is key – especially as India still remains a cash economy, despite rapid strides in digital payments.

Speaking about changing prices due to inflation, Kiran Giradkar, CMO, Nilon’s, tells afaqs! that this especially becomes a concern for brands in the impulse buying category.

“For such products, consumers may not be extremely concerned about what brand they are purchasing, but the amount they are paying for it. Hence, the price point becomes very critical for such categories. And, critical to such an extent that it can actually make or break a category.”

Giradkar recalls that years ago, the cost of Navratna hair oil sachets had to be increased from Re 1 to 1.50 to cover certain costs. One must note that the major chunk of the hair oil’s TG included small and medium scale workers who used it to cool down after a hard day at work. He mentions that the entire category had to suffer due to this alteration in price.

If a product from an impulse buying category is priced at, say, Rs 6, then there are greater chances of the consumer shifting to the alternative available at Rs 5.

However, Sita Lakshmi Narayan Swamy, a brand and consumer expert, notes that people might not always raise concerns about brands, with respect to these price changes. They are more sensitive to brands flouting norms and not meeting the requisite FSSAI’s standards (in case of food brands).

“Most people won’t count the number of biscuits that they get, while buying a Rs 10 pack. For a consumer to notice that the price has remained the same, but the quantity has changed, is not that common,” Swamy adds.

Experts say that a 10-20% quantity change is most likely to go unnoticed. Hence, brands prefer grammage reduction within this slab.

Tiding through quantity reductions

The challenge for brands, when they increase prices, is that they will often need to jump to the next convenient price slab. Due to the stickiness of these magic price points, brands find it extremely difficult to move the consumer to odd price points (Rs 12, 17, 23, etc.).

Also, in most cases, taking a price point off the market is not a possibility, as it may take away a major chunk of the brand’s consumers.

Mathias states, “This may significantly decrease the affordability for their target consumers or, worse, have competitors who do not increase prices, wade into the brand’s market share. Hence, brands typically ‘value engineer’ their offering, which may mean decreasing the quantity of product at the same price point, but can also sometimes mean adopting other cost reduction measures.”

Gurpreet Singh Amrit, CMO, Believe Cosmetics (ex-CMO of Cremica), explains that such volume reduction can be relooked on the basis of usage volumes. “For example, if a male user can wash hair with a 2.5ml shampoo sachet, a brand can reduce volume only to that extent. Else, the pack loses its utility. So, knowing your consumer and usage behaviour can help brands to make an informed decision.”

While in the short-term, this may sound as a good marketing practice to retain your customers for products which have mass appeal, it can hurt the image of the brand, if incautiously practiced over the long-run.

Britannia has used this strategy for its butter cookies ‘Good Day’, where it compromised on the quality. A good butter cookie turned into a dry brittle biscuit, impacting the product’s image. Meanwhile, another biscuit brand Parle-G managed to retain its mass appeal, even after decreasing the grammage for its smaller units.

Amrit also mentions that these convenient price points help in taking the brand to special audience cohorts. “It could be price sensitive or for out-of-home consumption or the uni-dose consumers. Such packs can be extremely beneficial in expanding the consumer base and reach of brands.”