Note: This one is a very comprehensive & vastly detailed article on PPA. By the end of this article, you will become quite cognizant of PPA & will definitely be able to make practical application of the knowledge provided by the author.
Why Coca-Cola has a bottle of 2.25 Lt, 1.75 Lt, 1,25 Lt, 750 ml, 300 ml, & 250 ml.? What is this obsession with manufacturing so many sizes, weights, and shapes?
It is not an obsession but a mere implementation of an optimal Price Package Architecture. We will learn about how to create a perfect PPA in this article.
Each market is different and companies cannot follow the “one size fits all” model. There are analytical tools and techniques which can be used for making insights-driven decisions.
One such data-backed approach which is widely used by companies, specifically consumer packaged goods (CPG) companies, is what is known as the Price Pack Architecture also known as the PPA approach of decision-making. Let’s dive into the world of this very interesting architectural model.
Things we will talk about in this article:
Price Pack Architecture: What is it?
Price Pack Architecture (PPA) is an analytical technique that allows companies & brands to provide consumers an option to select a product that meets their needs, at a price point they are willing to pay.
This model is especially used by leading consumer packaged goods (CPG) companies which enables them to deliver an increase in profitability, by capitalizing on key consumer trends.
When done right, price pack architecture helps a company drive portfolio growth and enhance its overall value proposition.
How PPA helps companies grow faster?
In India, shopping is an experience. We just don’t go out with the sole intention of buying things, we go out for enjoying the experience. Each shopper crafts his own shopping experience during his lifetime.
A person will behave differently during each shopping experience, and, for a brand, his buying decision will impact everything from product need & pack size selection to channel preference & price sensitivity. PPA will help to increase purchase propensity.
E.g., In 2013, Pepsico introduced a small can of Pepsi in USA which became a huge success garnering >$40 million in revenue.
How does one determine an optimal price pack architecture?
To derive this, some of the questions need answers:
The willingness of the consumer to pay for existing product features.
The willingness of the consumer to pay a premium for a specific Product feature.
The willingness of the consumer to pay a premium for the convenience offered by smaller pack sizes.
Formulation of the pricing strategy for new products for maximizing overall sales.
Competition of new products with the existing product range.
Cannibalization of new products with the current portfolio of products.
To determine the impact of various variables on consumers' tendency to purchase, a mathematical tool called Conjoint Analysis of PPA is used by brand managers. This method helps them to make a data-proven argument.
In most cases, successful innovations are considered to be a hit-or-miss proposition. However, the emergence of cutting-edge research through price pack architecture (PPA) has eliminated guesswork allowing companies to design new product variations based on consumer demand.
Below are two approaches with similar philosophies to follow for PPA designing.
A. 7-step process:
B. A simplified 3 step process:
Why do we need a PPA? Significance.
Consumers always aspire for authentic brands and products which instill a sense of confidence and reassurance. A trustworthy brand will eliminate their chances of committing mistakes while making a purchase decision.
An optimally designed PPA will help the brand drive economies during times of financial crunch. Altering the prices of certain Stock Keeping Units (SKUs) or launching new affordable packs which are relevant to a specific occasion will help the brand during difficult times.
Companies that execute their price pack architecture right can see their profits increase by roughly 2-5 percent.
How beneficial is an optimal Price Pack Architecture (PPA)?
PPA offers several benefits that can help companies maintain momentum despite the ever-evolving consumer trends and market challenges. Rather than focusing on costlier, build-from-scratch innovations, companies can make distinct strategic “tweaks” within existing product lines which can lead to higher margins and cost-effective wins.
It is important to note that PPA does not mean creating multiple product lines to cater to consumer needs, but rather using the architecture to improve existing product packaging to gain market share and category growth.
With insights obtained through PPA, companies can decide with greater confidence
whether they should continue/discontinue certain products. This, in itself, is a winning proposition!
What are the different Price Pack Architecture techniques?
1. New SKU Introduction: Measures the impact of new SKU at various price points on the overall portfolio and compare the results with the competition.
2. Price/Grammage sensitivity: Assesses the price points set by the competitor in terms of price and grammage and compares them with its prices.
3. Competitive Strategy Impact: Assesses the competitor’s impact on the changes made to the overall basket of products.
E.g., Here P&G's Tide launched a highly innovative SKU considering Price and Competitive strategy in place by launching Tide Pods.
What are the Key Features & Benefits of Price Pack Architecture?
1. Focus on Strategic Price Pack Innovation:
With the insights from PPA analysis, brands can tweak key attributes (like package size, price, and product) within existing product lines to help attain higher margins.
2. Identify Optimal Pricing Across Channels:
Companies can leverage PPA to identify optimal pricing across channels for different product configurations, which is ideal for different types of consumers & purchase occasions. Product improvisation/enhancement can also act as means to attract new consumers for expanding the customer base.
3. Confidently Make SKU Continuance / Discontinuance / Alteration Decisions:
PPA allows companies to decide with greater confidence which Stock Keeping Units (SKUs) they should continue or discontinue, and where can minor tweaks be incorporated that improve margins, attract new customers and grow the category.
What is Conjoint analysis?
List of Analytical methods to derive an optimal PPA.
Discrete choice/Adaptive Conjoint Analysis:
In this method a survey is being floated about the product attributes along with price points. After collecting enough data, it is reviewed at which price point, the company's profitability is highest or any other KPI company wishes to increase.
If the goal is to increase market share, the company may choose to let go of profitability for a short duration of time.
In the below image, a survey is asking to choose among 3 option of the smartphone. Researcher is using 3 attributes and 3 options. Once you have enough dataset from your target group, you go ahead with the option.
Another example of Conjoint analysis from Telecom Industry on 4 different attributes. By analyzing it, marketer can conclude which is the best price pack architecture.
Apart from Conjoint analysis, there are other tests that are effective.
Below is a list of good ones:
- Future Market Simulations.
- Elasticity-Base Price Simulations.
- Van Westendorp
- Max Diff scaling
- Virtual Testing
- In-Market testing
How do major brands leverage PPA?
What do 220 ml Coke “mini cans” and Heinz “Fridge Fit” ketchup bottles have in common?
Yes, both are packaging innovations borne out of consumer demand. In both these cases, customers were willing to pay that extra bit for unique features and benefits which ultimately led to profitable bottom-line growth in a declining category. In both these examples, it required only minor changes to existing packaging and size and it paid major dividends in terms of added convenience
1. Coca-Cola – A classic Example
A new breed of health-conscious individuals started evolving at the turn of the decade. Gradually, these health-conscious individuals moved away from the aerated soft drinks category and habituated themselves to healthy eating/drinking habits.
This became a problem for giants like Coca-Cola and Pepsi. To turn around this trend, Coca-Cola sought to offset the effects of this decline using a well-thought-out price pack architecture strategy.
Coca-Cola discovered that consumers were not only upbeat with an idea of a more compact bottle but were also willing to pay more per ml for a smaller coke as compared to larger Cans or bottles.
As an example, in Russia, Coca-Cola created a plan to address the challenges of low per-capita consumption and overall affordability of its products using consumer insights, pack-price architecture, and promotions to create a captivating customer selling story.
One specific initiative was the launch of a 900ml package size, which successfully contributed to the overall sales growth. In Italy, the company successfully used pack-price architecture to reverse the declining trend in the sparkling category. They launched several new packs including a 660ml PET bottle with a €1 price point as well as a new, smaller, 450ml pack for on-the-go occasions. This move helped Coca-Cola unlock opportunities for smart pricing which led to a return of sparkling category value growth in the market.
2. Oreo Price Pack Architecture:
Oreo is leveraging its pricing strategy by effectively using price pack architecture to expand its brand and platforms to new consumers and occasions.
3. Telecom Service Providers:
Telecom service providers (like Vodafone/Idea and Airtel) effectively use price pack architecture when they design their monthly recharge packs.
Based on historical data, they extrapolate the pulse of the consumer and design plans which act as triggers for consumers to subscribe to it. They bundle their product offering in a way to make an attractive proposition to their consumer base. Although in India post Jio, complexity in PPA has drastically reduced.
As we can see above, attractive packages have been designed by Vodafone/idea with special offerings in the form of subscriptions to OTT platforms in addition to the regular data/call features. This makes an eye-catching proposition for a consumer looking for “something Extraaa”.
4. OTT platforms:
Netflix and other OTT platforms are anchoring their pricing strategy along with extra offerings by effectively using price pack architecture to expand their reach to new consumers. There is a plan customized for each type of user. Offers are ranging from a mobile-only plan worth Rs. 199/month to a premium plan worth Rs. 799/month with added benefits. These brands work on the principle of inclusivity and have an offering to cater to a larger aspirational consumer base, thereby making it a win-win, for both, the brand and the end customer!
How has Price Pack Architecture evolved in the Digital Age?
Designing a good pricing strategy was a relatively easy task in the good old days, primarily because of less competition in the marketplace. Minimizing cross-channel cannibalization and increasing market share was relatively easy.
Then, what is different today?
Economic conditions, loads of new product choices, and proliferation in retail channels are among the major factors that propel the complex modern marketplace.
What has influenced price pack design?
And how do we implement an optimized price pack architecture in such a scenario?
To answer these questions, we need to understand some key factors:
1. The Economic Slowdown:
This gave many customers a survivor-shopper mentality. Value for money became the buzzword as hard cash dried up.
2. A Proliferation of SKUs:
SKUs have been increasing exponentially across brands over the years making it tough for these brands to standardize the SKUs in their portfolio. This added a certain amount of uncertainty in pushing the products of a specific SKU to the consumers.
3. Fragmenting Channels:
Gone are the days when an entire neighborhood used to shop at a single store. Brand Managers need to plan SKUs for multiple channels across categories. For example, suppose a city has a department store, a convenience store, and a grocery store. Customers might shop in all three stores, but for meeting different needs. For instance, a customer who wants to buy biscuits while on the way home from work might stop at the convenience store for a single pack. The same person, when buying his weekly groceries, is more likely to pick up a bigger customized pack of the same biscuit. In short, SKUs have to be rolled out keeping in mind the expectations of the consumer.
4. Greater Price Transparency:
E-commerce shopping platforms like Amazon and Flipkart have made prices highly visible. For example, face masks are increasingly being sold over the Internet. Online retailers make tracking “per-face mask cost” easier, so customers are more aware of price differences.
5. The Birth of Personalization:
Personalization is the need of the hour. The common message doesn’t fit all anymore and people expect their ad experiences to be tailored to their interests. If you don’t do it, your competition is out there doing just that. You don’t want to lag in attracting new customers. Mass selling is becoming more and more ineffective, and more agile competitors are selling “customized” stuff to the individual consumer. If you do not personalize, you are going to fall behind and repent later.
A relook at the existing PPA during uncertain times?
India is a country where the retail environment is very much promotionally driven. The potential customer is trained to look for – and wait for – a bargain.
Yes, promotions are here to stay – but retailers will need to be even smarter about how these promotions are used. Retailers have been under pressure to produce everyday low prices and have built pricing strategies around this. Given the recent turbulence in the retail market as many jostles for shares, there is a need to relook at the price pack architecture with a focus on “innovation and renovation”.
Innovation has been seen as a way out of the price war with a focus on new product development, however, finding new pack sizes and formats to hit neglected price points hasn’t always had the same attention. This needs to be relooked at.
On the other hand, in terms of renovation, it’s time to look at a range of packs and prices and how they all fit together.
Whether innovating or renovating, we have to look at how to position our products to meet shopper needs – both at point of purchase and usage occasions.
Optimizing for the perfect Price Pack Architecture
1. KYC (Know Your Consumers):
2. Optimize portfolio pricing:
3. Fill portfolio gaps:
What has changed since the pandemic began gathering strength in January 2020? Consumers around the world started adjusting their behaviors and their “willingness to pay” for the products they buy. Changes in consumption occasions, shopper missions, and buying criteria created new pockets of demand, and companies pounced on these opportunities in no time.
The overall objective of a differentiated pack-price architecture is to better meet the unique needs of consumers across channels—such as online, grocery, mass, discount, club, and traditional trade.
Customers will continue to experiment with new approaches, and the buying patterns and behaviors of consumers will keep evolving.
While we do not know which new habits will stick around and which will revert to their previous state, the changes that occur are likely to be so pervasive that they will radically reshuffle market shares across categories and geographies. All of this makes it imperative for companies to act quickly and decisively right now.
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