By Jen Johnston, CHHC, as seen in Chain Drug Review, August 30, 2018
A new product innovation with a large promotional spend does not automatically equal success in the retail marketplace. Too often, brands release a product with a new technology, form, ingredient or positioning, or a product that addresses an unmet consumer need, without fully considering the product’s earning potential.
Not only is earning potential critical to a retailer’s decision to buy a brand, but it also affects the longevity and success of the brand across all retail channels.
Having information on the consumers — who they are, how often they buy, the price point they are willing to pay and what they are looking for — is a key asset. If a brand does not have this, preliminary consumer research must be done prior to launch in order to accurately predict demand and earning potential. For example, gathering data on purchase intent and frequency of use can inform how often consumers might make a repeat purchase.
In lieu of conducting its own market research, a brand can size the market with syndicated data, breaking it down by segment to understand estimated prices, movement and profitability.
Like the analysts at Hamacher Resource Group Inc. (HRG) who consider products for inclusion in planograms for independent pharmacies, chain buyers look at five key factors: innovation, promotion, category growth, product orientation and earning potential. Buyers tend to view earning potential in two ways — immediate potential and how a product is likely to fare over time. They are asking themselves one primary question: Does the anticipated performance of a new item merit the shelf space and risk of removing a current item?
To even be considered for a retailer’s merchandising mix, a brand needs to be strong in more than one of the following areas: penny profit, top-line sales, inventory cost, savings in shelf space, turns, incremental sales and broad appeal.
When considering whether the item will drive penny profit, the buyer or category manager evaluates whether the SRP (suggested retail price) is appropriate to generate enough cash profit for the retailer, particularly compared to the competition. Buyers also want to be sure the product will bring in more top-line sales and want reliable figures indicating the gross sales the item can generate.
Retailers are always looking for ways to reduce their inventory cost, which can be one of their largest expenses. One way a retailer may look at inventory costs is whether a new product will save space on the shelf. If two SKUs can fit in the space of one competitor, creating more sales dollars, that’s a winning proposition for a store, especially if that item also has an equal or higher turn rate, driving shoppers to the aisle more often.
Additionally, if the new item creates incremental sales by bringing in a new demographic of shoppers who seek this type of product, it’s a great incentive for the retailer to find room to add that brand. It is even better if the item appeals to a wider range of established customers and meets the needs of shoppers who buy products like it at other outlets.
Earning potential is also based on pull-through. It’s not enough to get the product on shelf. Brands need to help the retailer sell through the product to create repeat purchases both at the shopper level and by the stores themselves.
This comes in the form of such manufacturer-to-retailer incentives as extended dating on the initial item purchase; introductory deals, including free goods; allowances to bring in displays and put the product on the store floor; and product placement fees.
In addition, the brand must help attract shoppers to the item specifically at the retailer’s locations, which can be done through advertising in the store’s circular or a temporary price reduction to drive sales. This is on top of general promotions and advertising to consumers and health care professionals, to build awareness and create demand.
Brands, however, “cannot simply live in the now,” says Angela Pinkstaff, director of business development at HRG. “Earning potential is about the long haul, so brands need to meet current shopper expectations while also anticipating and addressing future needs.”
Brands should understand their own relevancy in the category and subcategory in which they play. Being prepared for what’s next is mission-critical when considering earning potential — this could include line extensions, ingredient adaptations, reformulations, new delivery systems or a new category.
Brands must also have the foresight to see how the category itself is changing, in order to meet evolving shopper demands. Retailers should consider brands that have gone above and beyond to prepare a vision for the category or subcategory that might not exist today. Thoughtfully crafted evolution can result in true retail transformation.
Remembering the importance of earning potential is pivotal to the longevity of a brand.