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Choosing the Right Pricing Strategy in the Food and Beverage Industry

5 minute read

Article by: Rich Medrano, Leader of the Revenue Growth Excellence Practice and Christine Bart, Senior Consultant Engagement Manager at Catena Solutions

Food and beverage organizations are operating on tighter margins than ever before.

The combination of high inflation, supply chain issues, and the rising cost of manufacturing has created a perfect storm that’s forcing companies to adopt new strategies to maintain their margins.

This is where pricing comes in. An effective pricing strategy plays a crucial role in the food and beverage industry by driving revenue growth. Additionally, pricing also enables brands to stay or become relevant in a highly competitive atmosphere.

For start-up companies and major players alike, landing on the right pricing strategy can improve a company’s bottom line, boost customer perception, and establish their competitive position. In this article, we explore the best pricing strategies for food and beverage companies to consider in today’s unpredictable market.

Identify your business goals

Before delving into the various pricing strategies, organizations must identify their business goals so they can choose a strategy that supports them.

While a company’s overall objective will most likely be maximizing profit, there may be other short-term goals to consider, such as:

• Turning small profits per item
• Getting rid of excess stock
• Raising production volume

Additionally, where a company is in their growth lifecycle will impact the pricing strategy that’s best for them. Pricing strategies can also be fluid, and a business may flow between multiple strategies in a short period of time depending on organizational goals. Taking the time to analyze and set goals first is a crucial step before selecting and implementing a pricing strategy.

Factor in food and beverage industry considerations

For Fortune 500 manufacturers and quick service restaurants alike, pricing is about more than profit margins. Pricing in the food and beverage industry involves a delicate balance of quality, consumer perception, and operational costs.

Here are nuances of the food and beverage industry to consider when deciding on a pricing strategy:

• Business fluidity: Seasonal demands and the volatile nature of the industry means organizations will need to be agile in transitioning between strategies and ensure they maintain pricing that reflects business objectives.
• Supply chain complexity: Food and beverage supply chains are inherently complex, with organizations having to consider perishable products, regulatory compliance, a network of partners, demand fluctuations, and quality control issues.
• Competition: With hordes of similar products and brands vying for market share, the food and beverage industry is one of the most competitive markets there is.
• Price consciousness: Consumers are feeling the strains of high inflation, leading them to shop differently, including buying more store-brand products and fewer gourmet items.
• Brand image and perception: While a pricing strategy’s overall goal is to support revenue growth, building and maintaining a strong brand image and perception in the market may override increasing margins at times.
• Distribution channels: An organization may sell its product or services via various distribution channels (i.e., retail, direct to consumer, storefront), leading to different pricing strategies depending on the channel.
• Technology availability: Technologies like AI and predictive analytics can be extremely helpful in determining an accurate pricing strategy, but they can create even more problems if companies use technology they haven’t mastered or build systems off bad data.
• Market research and analysis: Conducting thorough research and analysis is necessary to gain valuable insights into pricing elasticity, demand fluctuations, and benchmarks within an industry segment.

Understand the different types of pricing strategies

In this section, we’ll explore pricing strategies commonly adopted by food and beverage companies, why a company might choose a particular strategy, and an example to illustrate each.

#1: Competitive pricing

What it is: With competitive pricing, prices are set based on market rates and the pricing of competitors’ products.

Why use it: The food and beverage industry is intensely competitive. Analyzing competitor pricing strategies, product positioning, and market positioning can help companies adjust their pricing to stay competitive while maintaining profitability.

Example: If a competitor is selling a box of snack bars for $3.95, a company might sell their comparable box of snack bars for $3.89.

#2: Economy pricing

What it is: With economy pricing, prices are set as low as possible. The focus is on cost efficiency while still being able to turn a profit.

Why use it: Brands that want to position themselves as a budget-friendly option may use economy pricing to deliver value to their customers.

Example: Walmart’s commitment to “Every Day Low Prices” is a classic example of economy pricing in action.

#3: Dynamic pricing

What it is: Dynamic pricing involves adjusting prices in real-time based on demand fluctuations, market conditions, competitor pricing, and customer preferences.

Why use it: With AI and predictive analytics systems, businesses can make data-driven pricing decisions that optimize revenue and enhance competitiveness.

Example: A retailer normally sells a specific ready-to-drink cocktail brand for $20/case, but their data analytics system shows that demand for ready-to-drink cocktails will increase in summer months, so the store lowers the price to $18.99 to capture more market share.

#4: Value-based

What it is: Setting prices based on the perceived value they deliver to customers.

Why use it: Value-based pricing leverages unique selling points like premium ingredients, health benefits, sustainable practices, and other features to determine its price. This strategy enables companies to capture higher margins and build a loyal customer base that’s willing to pay more.

Example: Brands that tout organic, sustainably sourced, or high-quality ingredients may sell those items at a markup based on consumer perception that the products deserve a higher price. Starbucks is a famous example of value-based pricing since it charges a premium for its status and the quality of its products.

#5: Bracket pricing

What it is: Also known as tiered pricing or price bracketing, bracket pricing is used to offer products at different price points based on factors like quantity, size, or packaging.

Why use it: Companies can cater to a diverse range of customer preferences and purchasing behaviors while maximizing revenue and profitability. Bracket pricing considers supply chain and logistics factors when setting prices and promotes more efficient customer behavior.

Example: Retailers often offer larger quantities at a smaller price per item since they are easier and cheaper for the manufacturer to pack/ship, so they want to encourage customers to purchase items in this format.

#6: Penetration pricing

What it is: Penetration pricing is when companies set their initial prices low to quickly capture market share.

Why use it: Penetration pricing stimulates demand and encourages customers to try a product. It also helps build brand loyalty and steer customers away from competitors.

Example: In product launches, initial prices may be set at a loss or with minimal profit margins so the product/company can penetrate the market.

#7: Discount pricing

What it is: Offering products at a reduced price to incentivize purchases, attract customers, and drive sales.

Why use it: Discount pricing is an effective strategy to clear excess inventory, promote new products, boost customer loyalty, or increase market share. However, it’s important to consider how discounts impact profitability and brand image and ensure they’re strategically implemented.

Example: Discount pricing is prevalent across the industry in the form of clearance sales, promotional campaigns, combo deals, coupons, loyalty programs, bulk discounts, and seasonal promotions.

#8: Price pack architecture (PPA)

What it is: PPA offers items at various sizes, formats, and price levels so consumers have various options to choose from. It involves a deep understanding of consumer behavior, market dynamics, and competitive pressure.

Why use it: PPA optimizes pricing and packaging to maximize sales, profits, and market share.

Example: Beverage companies offer soda in various purchasing formats and price points: single serve bottles, multipacks of bottles/cans, and 2-liter bottles.

Choosing the right strategy

The way a company sets prices is a direct reflection of what they have to offer. Additionally, prices create a relationship between a product/brand and its consumer, so ensuring a pricing strategy that’s fair, accurate, and value-building is key for sustainable growth and business success. Learn more about our Revenue Growth Management solutions today.