Elasticity

Earlier this week, Target announced it will be cutting prices to move excess inventory.

The inventory, it appears, is mostly in home goods and furniture, but the thought from analysts is that this isn’t just a Target thing. It’s a retail thing. And more price cuts will be coming—even to categories where demand remains strong, like food and beauty.

We’ve been talking in this space for awhile about pricing and positioning, but this move from Target is likely to be the first of many that will make it a topic of more importance.

It seems, then, that now is a good time to test price elasticity.

As we’ve written previously:

In its 2020 CPG Growth Leaders report, released about a year ago, IRI noted that while CPG growth accelerated to 10% YoY in 2020, “large CPG innovation and hyper-targeted small CPGs” are increasing premiums at the top-end of the market, while more value brands and private labels are capturing more of the rest of the market.

In other words, IRI spotted a bifurcation in the market a year ago. And it’s the same one that existed during the recession.

At the time of the 2020 Growth Leaders report, we wrote:

“On its face, this appears to be a win for DTC brands as more develop retail strategies. But in a highly competitive market (like breakfast cereal, for example) there’s also a dangerous dynamic at play: If the market is truly bifurcating, brands following the traditional DTC playbook risk getting stuck in the middle.

A slightly-better-for-you version of something at not-quite-a-premium price is how the traditional DTC brand could be described. You could also describe this as attempting to blur the lines between value and high end. And based on the IRI insight, it sounds like that approach may end up being an uphill battle.”

Perhaps this will continue to be true, but there was an additional insight in IRI’s latest report that lends a potential tailwind despite macro headwinds: consumers gravitated to comfort and personal indulgences during and after the recession.

Given this, pricing and positioning may be more valuable than ever.

For smaller and emerging CPG brands, then, price elasticity testing may become a growth lever.

The bet here—or the hypothesis, at least—is that when larger CPG brands cut prices to maintain market share, smaller brands are likely to lose their lighter buyers.

This likelihood is more tied to consumer behavior and a brand’s market size than a brand’s near-term marketing tactics, so trying to fight them by responding in the same way as larger competitors may be futile.

(We’ll note there are nuances and exceptions to this, but will skip those for now.)

Instead, a move to increase prices would mean ceding a group of light buyers in exchange for more revenue from existing heavy buyers—and new customers who align more to the demographics of existing heavy buyers.

DTC is, perhaps, the best place to do this: The testing is easier, the feedback loops are tighter, and, the line of sight into long-term implications—like repurchase rates—is clearer.

It seems important to know the implications of this now, so you don’t have to find out on the fly when changing prices feels like the only choice.