Industries
Highlights
- Supply chain disruptions due to global factors, high inflation, and structural shift in trends have made the business environment volatile.
- Increased volatility, amid rising inputs costs, is putting strain on the top line and bottom line of CPG companies.
- They can maximize revenue and profitability with revenue growth management, which leverages cross-functional data to provide insights on various revenue levers.
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Businesses face heightened volatility
Rapid advances in technology, combined with changing consumer preferences, have made the business environment volatile.
Recent events such as the pandemic and geopolitical tensions have exacerbated the volatility, making businesses vulnerable and fragile due to supply chain disruptions, high inflation, increasing adoption of e-commerce, extended work from home, and several other factors that contributed to the structural shift in trends. As an antidote to fragility, business leaders need to arm themselves with a wide array of tools to tackle volatility. Revenue growth management (RGM) is one of the most effective tools, especially in managing the top line and bottom line.
Volatility is hurting CPG companies
Increasing volatility is a challenge for CPG companies.
Rising raw material costs due to inflationary pressures is impacting the cost of goods sold, hurting margins. As consumer habits change—like their shift to e-commerce, for instance—it is imperative that CPG companies focus on an agile supply chain that can adapt to the shift in channel behavior. Changing consumption habits like preference for at-home and healthy food products make product development and innovation important for the CPG players. Also, the changing demographics, like growing incomes in emerging markets, make consumers aspire for more premium brands.
All this means that CPG companies need to be agile, use a data- and insights-based approach to closely monitor the shifts, and take timely action to adapt to the dynamic changes in the business environment. This is not a matter of choice but a survival imperative, as volatility has a direct bearing on top-line and bottom-line measures.
Fight volatility with revenue growth management
Revenue growth management (RGM) is an approach to maximize both revenue and profitability.
It leverages cross-functional data and generates insights on various revenue levers; pricing, promotion, product mix, and trade investment are the levers in the case of CPG companies. Safeguarding both revenue and profitability becomes crucial during volatility. This can be achieved by leveraging data for insights to make right, timely decisions.
Datasets such as inflation index, people’s mobility, sales data, pricing, and promotion data can help capture the nature of volatility. These datasets, when analyzed and put through various algorithms and scenarios, will offer insights to help with the following decisions: What is the right pricing for products, what promotions can maximize uplift and ROI, what is the right product mix to maximize outlet revenue, and how to react to competitor moves? Optimizing these decisions has a positive impact on the top line and bottom line, especially during volatility.
In the absence of insights-based decision-making, businesses can end up losing market share and suffer profit erosion. The following approaches provide guidance on how companies can deal with some common challenges in managing volatility.
Be on top of dynamic business trends
CPG players need to keep pace with the dynamic changes in consumer habits.
As mobility increases, the balance between sales of at-home and away-from-home products is changing. Demand for at-home products peaked at the height of COVID-19. But following the recovery from the pandemic, there is a shift towards greater consumption of away-from-home products. For example, US-based global CPG player General Mills, with 85% at-home products, benefited from the increased demand for this category during the pandemic. But, with greater mobility due to the expected return to normal, out-of-home products will find more favor with customers. Hence, General Mills expects demand to fall by roughly 3% of organic net sales.
Using revenue growth management techniques to closely monitor the change in mobility and its impact on at-home and away-from-home products is critical to managing the top line. Mobility can be monitored using Google mobility report.
The revenue growth management lens in a dynamic business environment should consider these factors:
What is the shift in the balance between at-home and out-of-home products?
What is the shift in demands across channels?
What is the shift in demand across pack sizes?
What is the impact of supply chain constraints on product supply?
What is the shift in demand toward healthy and eco-friendly products?
Get the pricing right for a healthy bottom line
Volatility in the prices of commodities, raw materials, and freight impacts the bottom line of CPG companies.
It is important to closely monitor input costs and take right decisions on pricing and promotion to protect the bottom line. Passing on price increases in the cost of goods can be a risky proposition as end-consumers could shift to alternative brands. Absorbing the increase would also be a losing proposition as it would hit the bottom line. Revenue growth management techniques, especially those using elasticity calculators, can help with calibrated price increases to protect the bottom line.
The revenue growth management lens for pricing and promotion:
What is the impact of inflation on the cost of goods sold?
Which products are more price-sensitive and which are less price-sensitive?
How is the competition addressing price changes?
How is the demand for products across price tiers?
Build resilience through revenue growth management
Revenue growth management helps companies deal with the changing business environment and the resultant volatility.
Businesses can manage volatility by monitoring the business dynamics captured through data sets like price changes, mobility of people, and inflation index and by obtaining insights from the data sets through analysis done with various algorithms and simulation scenarios.
The entire cycle of monitoring the business environment, analyzing the data, running the right algorithms, providing what-if scenario analysis, and generating insights should be automated to bring agility and scale across the enterprise. Businesses that leverage these revenue growth management tools and techniques outperform those whose decision-making is not backed by data and insights.
As renowned author Nassim Nicholas Taleb said, “Fragility is the quality of things that are vulnerable to volatility.” In an increasingly volatile world, revenue growth management provides the ammunition to make businesses anti-fragile.
What-if analysis will protect profitability
Disruptions in the past few years have necessitated scrutiny of the top line and bottom line.
They have given rise to the need to track and manage the demand and supply parameters that impact revenue and profitability.
CPG companies have been hit especially by the increased cost of goods due to inflation and increased labor costs. Revenue growth management techniques help effectively manage the top line and bottom line in such difficult situations. Tools like what-if scenario analysis and simulators can help play out different scenarios and choose the ones that better protect the top line and bottom line.
The revenue growth management lens required to protect revenue and profitability:
What is the profitability impact of moving specified products to ecommerce channels?
What is the profitability impact due to the increase in the cost of goods?
What is the optimum new assortment that maximizes revenue and profitability?
What is the revenue and profitability impact of price changes?
