Inflation's Opportunity
To Inflation and Beyond: Moving Beyond Pricing Strategy to Maximize Budget Efficacy
How Smart Manufacturers Are Rethinking Their A&P Strategy to Win in Inflationary Times
Whether it's retailers, manufacturers, shoppers, or your neighbors, you can't avoid hearing about the rising price of groceries. Over the last five years, grocery prices have been impacted by COVID, ongoing supply chain issues, inflation, environmental craziness, bird flu, and now tariffs, with the future not showing any real signs of true relief in the shoppers' eyes.
With grocery prices continuing to rise and no end in sight, manufacturers and retailers are facing critical decisions about how to allocate their marketing resources effectively.
With all of that said, we've seen A&P (advertising and promotion) budgets continue to increase as a percentage of total company revenue, and recommend spends at 5-10% of revenue for established brands. With new and emerging brands, or brands looking to move from B2C into a more comprehensive omnichannel retail environment, we would recommend 15-20% of revenue be dedicated to A&P. And while we've seen the budgets increase, what has been more remarkable is how those funds are being spent across the breadth of services that A&P budgets cover.
This is where our AUC proprietary methodology, Nudgenomics™, offers transformative potential. By combining behavioral economics with consumer psychology, Nudgenomics™ provides manufacturers with cost-effective alternatives to traditional price promotions.
Over the last twelve to eighteen months, we've seen trade spend grab 12 points of share from the total A&P budget, placing it at almost 50% of total spend (“2024 Market Spending: Finding Solid Ground with CPG Under Pressure,” Cadent Consulting Group). The greatest growth in trade spend was seen in the areas of temporary price reductions and ongoing price management. Growth in this area does not really come as a surprise, as manufacturers are leveraging those tools to help buy down the inflationary impact on their pricing to keep their buyer base "whole." But is that the right strategy? Or is it a short-term solution that will only serve to create long-term problems? What are we to do?
The data is clear: Manufacturers are shifting significant portions of their marketing budgets toward price-related tactics. However, this approach may not be sustainable in the long run. Instead, we recommend the following strategies to optimize your A&P effectiveness.
Understand the Roles Brands and Retailers Can Play
Manufacturers will need to understand both the unique role retailers play in their strategy as well as the role that their brand(s) play for retailers. These roles are not static, either. They can change based on goals or even time of year. Regardless, it is critical to understand what these roles are to actually budget accordingly and ensure you are leveraging the right tactics to deliver against those roles.
Speak to Both Current and Target (Future) Shoppers
Budgets need to be deployed based on a blended strategy of who your core shoppers are today and where your shoppers will come from tomorrow. So often we see manufacturers just set budgets based on share of where their business is today. Instead, we need to think about goals and future target audiences to redistribute budget dollars in a way that maximizes return on current shoppers while prospecting against target audiences.
Plan Trade, Shopper and Media Budgets Collectively
With a good portion of trade dollars shifting to mitigate the impact of price increases, now more than ever, manufacturers need to ensure that there is collective planning of how and when budgets are deployed. Alongside trade budget increases, we've also seen shopper and media budgets increase as manufacturers invest in tactics that are closer to conversion (“2024 Market Spending: Finding Solid Ground with CPG Under Pressure,” Cadent Consulting Group).
Think Outside the Box When It Comes to Tentpole Events
New Year, New You. Back-to-School. Holiday. Super Bowl. Manufacturers and retailers all have them: tentpole events. The problem is that typically MANY manufacturers and retailers have the SAME tentpoles. Based on brand and retailer roles and what total budgets allow, manufacturers may want to be selective on where and/or when to invest in tentpole events.
Act Locally
If manufacturers aren't ready to plan trade, shopper, and media together…and perhaps even if they are…there are still opportunities to be more efficient with shopper and media budgets. Based on your target audiences and goals, you may want to hyper-localize your investments rather than spreading those budgets peanut butter thin. In addition, if you are focused on closing geographic white space opportunities, consider allocating budgets based on those white space versus just a retailer's share of sales.
Moving Beyond Pricing Strategies
We believe that pricing actions (like temporary price reductions) will prove ineffective or unsustainable, but there are non-price-related strategies that can help drive sales, enhance brand equity, and improve retailer relationships while maintaining pricing power. It will just take a village to get there.
Nudgenomics™ research shows that consumers often make purchasing decisions based on subconscious cues rather than rational price comparisons. Our Nudgenomics™ Lab has documented how strategic application of cognitive biases like anchoring, scarcity signaling, and choice architecture can maintain or even increase perceived value during inflationary periods and reduce promotion dependency while maintaining or growing market share.
In this challenging inflationary environment, the brands that will thrive are those that strategically invest in building value perception beyond price alone. By implementing these five strategies, manufacturers can position themselves for both short-term sales success and long-term brand health.
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