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Natural Pricing's New Paradigm: Part 1
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By Darrin Duber-Smith

 

Over the past 50 years, marketers of natural and organic products up and down the supply chain have enjoyed a distinct luxury that most marketers only dream of -- a constantly expanding market consisting of consumers who are willing to pay a premium for specialty products that they consider to be superior to mainstream alternatives. And it is certainly true that natural and organic ingredients do tend to be more expensive than their more standardized, synthetic counterparts. It is also true that a relative lack of volume has historically kept prices higher than they would otherwise be if these products were consumed at a higher rate. Indeed there have been pressures that have forced marketers to maintain high price points.

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But to be fair, it is also true that ingredient suppliers, finished goods manufacturers, distributors, and retailers alike have long enjoyed some rather comfortable profit margins relative to their mainstream counterparts. This sort of pricing power tends to disappear as an industry matures, but the natural products sector has been in high growth for as long as most of us can remember, and still seems to have more gas in the industry tank. Of course, the overall lack of agreement as to what “natural” really means and possible future regulation in the future as the FDA currently reviews its options (not to mention any new scrutiny of DSHEA) loom as threats in this historically lucrative marketplace. Yet overall, things still look pretty rosy for natural products marketers—unless of course, like me, you too are concerned about what new entrants like Amazon might do to the industry’s long-established pricing model and consequently to some of the industry’s more established players.

 

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For years, most marketers in the industry have successfully employed a “premium” pricing strategy and have positioned their brands (and all of the products within the brands) as premium offerings, replete with higher quality ingredients, more sustainable packaging, and more socially responsible business practices. These things cost money after all, and as long as the products deliver on the promises marketers make about them, things tend to work out rather well. And as long as the market continues to grow rapidly, an industry can theoretically maintain a large number of fairly homogeneous competitors who all charge elevated prices. But at this time, it might not be a slowing market or high ingredient costs or too much competition that pose the greatest threat to the natural products industry’s status quo.

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Rather, an even more pressing threat looms from expanding channels of distribution characterized by larger players who enjoy vast economies of both scale and scope and who are often the “captains” of their respective channels. Amazon and Wal-Mart come to mind as two retailers able to offer obscenely low prices due in large part to this leadership. The big natural and organic brands that these huge retailers carry also enjoy large economies of scale and scope even if they don’t have the most influence within their channels, and some are beginning to explore distribution options that fall well outside of the traditional manufacturer-to-grocery channel retail model. Great care must be made to avoid “channel conflict”, which is often created when manufacturers undercut retail partners on price by offering products at lower prices in other channels, and it is clear that the distribution options for all branded products continue to increase.

 

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While much of this is certainly excellent news for consumers, it is not good news for marketers who are unable to compete effectively on price in this new era for nutritional supplements and other natural products. And in the 25 years that I have been working with companies in this sector, I have noticed that pricing strategy is an often under-developed piece of the marketing mix. This is fine as long as the party keeps going; but the rise of natural discounters such as Sprouts, the ongoing mainstream retailers (Wal-Mart, Kroeger, et al.), as well as the growing importance of e-commerce players such as the online behemoth Amazon in selling natural products, should make every marketer in the industry pause and assess pricing strategy.

 

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One of the best ways to do this is to look at pricing first with respect to your brand strategy. Brand identity and image have quite a bit to do with how much money consumers will exchange for any good or service, and it is no different for marketers of nutritional supplements, functional foods, or other natural-based products. But there are other important factors in play and luckily, we have a very succinct model to help us become more adept at pricing our products. And in an industry that has seen Whole Foods Markets rapidly and unceremoniously acquired by Amazon, it should be clear that the path to success is becoming increasingly perilous. The key is to justify your price point by considering number of different but related factors.

 

(To be continued in Part Two)