Industry
HIGHLIGHTS
- Pricing sustainable products is one of the major challenges CPG companies face, affecting their revenue and profitability
- Manufacturing sustainable products is expensive, but they still need to be priced properly for commercial success.
- This challenge demands tools and a data-driven approach to arrive at the right pricing points that capture consumers’ wallet share.
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Sustainability is the need of the hour
Sustainability is no longer just a trending catchphrase but the need of the hour.
In a bid to conform to the trend and better aid the cause, consumer goods manufacturers are creating products with sustainability in mind. However, the sustainability movement for consumer-packaged goods (CPG) is facing challenges in taking off. The pricing of these products is a key element to blame for the lack of their large-scale intake.
Consumers have often complained about sustainable products being priced more than what they are willing to pay. That means pricing is now an impediment to the adoption of sustainable products, often leading to product failures. CPG companies need to rethink the way they develop and price sustainable products.
Sustainable ≠ premium pricing
CPG companies have been creating and selling sustainable products the same way as they do premium products.
They add a few premium features include some ingredients, like organically sourced materials, differentiation, and aesthetically package the product to sell it at a higher price. Research shows that consumers are willing to pay a premium for sustainable products but not as much as CPG firms demand.
However, the assumption that a few additional features will make consumers pay a premium price is a flawed approach to selling products on. There are two problems with this strategy:
- CPG firms’ view of what constitutes sustainable features may differ from the consumers’
- The premium being charged may not align with the consumer’s willingness to pay.
There’s often a disconnect between sustainable product innovation and what the consumer may consider sustainable. For example, consumers may care more about the reusability or durability of a product and if it minimizes waste or plastic use. In contrast, CPG companies may heavily rely on premium, organically sourced raw material for sustainability pricing. While both views have their own merits, the resulting price tag may mean these features conflate ‘sustainability’ with ‘premium’ pricing. As a result, a vast majority of consumers may be led to believe that sustainable living is an expensive proposition.
Value for money
CPG companies can evaluate their pricing strategies using two approaches.
The approaches are:
- Evaluating consumers’ willingness to pay
- Value engineering
Adding too many features to a product without a deeper due diligence on consumer preferences and their willingness to pay poses a challenge to the successful launch of products. Different sets of features can result in differences in product pricing. Using the willingness-to-pay approach, CPG companies can understand the maximum amount a consumer would spend on a product and accordingly optimize their pricing strategies. Running pricing comparisons backed by a clear view of the features and their corresponding impact on pricing can help companies pitch new sustainable products in the right ballpark.
In addition, CPG companies might add too many features to a product and charge a premium. However, having insights into the most and least desirable features can help create and deliver a more popular product. To that end, value engineering is a useful technique to prune features that don’t stand out for consumers. Consumer packaged goods companies can utilize value engineering to enhance product value while minimizing cost, in turn improving competitive edge and sustainability. For instance, by redesigning products or packaging to enable the use of fewer materials or more cost-effective alternatives, companies can achieve significant savings. Additionally, CPG companies can use the price feature ladder to compare other successful sustainable product features and the corresponding pricing.
Taking the long view
Sustainability cannot thrive on exclusivity.
It must be a movement for the masses, and pricing is key to the market success of sustainable products for this segment. That means CPG companies need to move away from viewing these products as opportunities for premium pricing or over-engineer product features and become more cognizant of consumer preferences for sustainable products. Tools like conjoint analysis, willingness to pay, value engineering, and price feature ladder can help address these common mistakes and build truly successful sustainable products. In addition, companies will need to place consumers conscious of the environment at the center of their innovation. The journey toward sustainability is not just about selling products but fostering a mindset where responsible consumption becomes second nature. When companies prioritize the planet and the consumer equally, profits will follow, and the dream of abundant, sustainable living can become a reality for all.
