Talking about value seems easy: a product has a function, and that is its value. But there is more: When it comes to items from the cosmetics and personal arenas such as cleansers and creams, for example, these goods provide extra value in addition to their basic function.
There is obviously this functional element of a product but there is also the extra value that is immaterial to the delivery in terms of its brand and emotional factors — and it is here that smart executives start thinking about value extraction, which in turn affects the price that can be charged.
It’s all about perception
It is important to recognise that “perception is reality”, and so the real challenge for cosmetics and personal care brands is to “define how they are perceived”, and therefore, recognise their ultimate value.
On behalf of brands, we set about asking Dr. Jochen Krauss the crucial questions on how to hone pricing strategies for 2018.
- As we head into 2018, what can we expect to see from company's value pricing?
One of most challenging aspects of value pricing is how to overcome the basic cost-plus calculation. This will typically be formed through understanding how the market is fluctuating, calculating the profit margin and then creating a price.
However, this does not take into consideration the value that the particular offering directly provides to its customers.
Use of tech in APAC
Many companies throughout Asia-Pacific, several in particular in Malaysia and Singapore for example, will conceptualise a value offering that utilises specific technology.
The big hurdle — particularly for multinational company-based technologies who have the resources to invest in considerable R&D — is to fully understand the function of that technology, its many dimensions and what this technology specifically contributes to the overall offering.
For instance, this may relate to market trends or contemporary business initiatives such as sustainability or non-animal testing pledges.
The real consideration and question for brands is how to then communicate this offering into money. This is not as easy, as many brands do not understand with complete clarity what consumers' demands are, and how they can be met.
Brands need to answer the following questions:
- What is my product’s value to my consumers?
- How does this differ by consumer segment?
- How much will consumers pay for this?
- How can we differentiate our offering from our market competitors?
It is this final question that poses the greatest difficulty for cosmetics companies.
A large multinational company can have access to the most advanced technology on the market, but if customers do not recognise this via a new product, consumers may not want it and so there may be no demand for formulation.
Even if brands have a product development opportunity, it is vital that this is matched to needs or desires. If not, companies risk being forced to sell these items at a huge discount – or not sell them at all.
Scenarios to avoid
There are four "flop categories" that brands need to avoid:
1. Feature shock
This is where a brand develops a new product, the team is excited about this, and it keeps on adding features and functions (“because we can”). The result is that the costs become too high, a higher price is needed to achieve a target margin, and finally the volume targets are not met. In the end this leads to promotions and discounts.
Alternatively, brands may develop a new item, but do not realise how big of an opportunity it presents. As a result, it is not communicated correctly to the target audience as the marketers believe it is an add-on item. Equally, brands are unable to monetise it, even though in reality it could be really successful.
3. Hidden Gem
Similarly, if a brand does not recognise the potential an innovation offers, it might not communicate it correctly, might not price for it – and in the end, give away a great product at a really low price.
The final category relates to products that either provide the wrong answer to the right question, or an answer to a question nobody asked.
"Luckily, these flops can be avoided!" Dr. Jochen Krauss emphasised.
The second part of this article, which explores the idea of failure and the recommended approach to it, will be published on Monday 11th December 2017.