For most consumers, understanding why companies charge what they do for a product is an absolute mystery. This is especially perplexing for them when they see two similar products side-by-side, but one costs 25% more than the other.
While pricing is confusing to customers, it is also a challenging and often complex decision for marketers. This is due to numerous internal and external factors affecting what will eventually impact the final price. But as we noted, customers don’t really understand pricing or what factors impact price. They only know, that for some products, the amount of money they need to give up to purchase the product does not make sense to them.
A good example of pricing that may not seem to make sense to some customers is noted in this story from NBC News. The story examines the continuous price increases impacting the breakfast cereal market despite an overall decline in consumer cereal purchasing.
The fact cold cereal sales are declining may be an indication this product category, which has been in the Product Life Cycle Maturity stage for many years, is now inching toward the Decline stage. As evidence, the story notes the overall cereal product category market has dropped by nearly $4 billion since 2000. This is not to say all breakfast brands are declining, as there are several brands and even product forms that are growing. Yet, one strong indication breakfast cereal is entering the Decline stage can be seen with manufacturers’ pricing strategy. Several of the top manufacturers seem to be moving toward a “milking” strategy (no pun intended!!) in which product suppliers raise price in order to get the most out of those who are still loyal to a brand. This price increase seems to be happening in three ways in the cereal market: 1) companies are simply raising the price they charge for the same size product; 2) companies are keeping the price the same but are decreasing the size of the package; and 3) companies are drastically reducing the number of coupons they offer. The last one is essentially raising the price for people who are accustomed to waiting to make their purchase with a coupon.
If the breakfast cereal market is entering the Decline stage, do not expect this product market to fade away anytime soon. Most likely it will stay in the Decline stage for a very long time. Thus suggesting that a price increase can be a very profitable decision for breakfast cereal companies.
Image by Rex Roof