React with purpose, but do it strategically   

How should companies adjust to the shortage of critical ingredients and the increase in cost of goods? 

As a manufacturer, one of the first things you might be considering is increasing the price of your products. 

During the 2008 recession and recently during the COVID-19 crisis, consumers didn’t overtly become more price sensitive —price elasticities were stable—but they still compensated by changing what was in their baskets (choosing private label and value-tier products and cutting back on other purchases).  Nevertheless, cost pressures are going to force a need for a short-term reaction, and with others likely doing it, it might feel like a safe time to make price increases. However, it’s also a unique time to gain share and competitive advantage by being more surgical (remedying irregularities in price across your SKUs or brand tiers), accompanying increases with reinforcement of your value, and/or maintaining prices where you can across your portfolio.  

Another strategy you might be considering is downsizing. BASES global pricing experience suggests that nearly two thirds of the time, a downsize doesn’t produce a better result than a straight price increase. It also comes with risks and costs such as implementation costs and potential PR backlash. 

Part of this is because consumption isn’t fully elastic; while some products can downsize without big impact, many can’t.  There is no guarantee that if you reduce your package size by 10%, consumers will rebuy your product that much faster.  Unfortunately, there is no guarantee they will rebuy it at all—each purchase cycle is also an opportunity for buyers to shift to competition.    

An alternative to reducing the size is offering larger format sizes and embed price increases there.  Larger sizes can have the opposite effect of downsizing: you can give your consumer a better value and keep them away from competitors longer. 

How about changing the product formulation to compensate for the supply chain issues? 

When faced with a significant supply chain issue, avoid reducing your quality. Long-term product endurance is strongly correlated with product satisfaction, and that is only becoming truer in an age of online reviews where triers can more readily share their experiences with the world. NielsenIQ BASES experience shows that new products with a poor product experience only have a 5% chance of survival.  Unfortunately, even established brands aren’t safe: 70% of consumers globally buy 3 or more brands within a given category, meaning a decline in quality can lead them to choose other brands more often.      

Finally, if you’re considering a new product launch that is severely impacted by raw material scarcity, you might want to consider alternative strategies such as focusing the launch (soft launch, regional launch, a retailer exclusive, limited time offering) to manage production capacity, or delaying it.  A limited time offering is a way to keep your commitments to retailers, while also keeping consumers engaged.  It also gives great insight into the long-term potential of the new product and builds a foundation for a broader relaunch later.  However, if your new product can’t be produced as needed, a delayed launch may be the best option as it avoids wasting marketing resources, damaging retailer relationships, or burning bridges with consumers through a subpar execution.   

Doing what you need to now, while keeping an eye on the future 

It is too early to know with certainty where this crisis will land.  This said, when supply chain challenges or margin pressures force you to rethink your approach, ensure you’re properly measuring the impact of those changes.  There are robust, but agile, solutions you can leverage to make data-based decisions that balance what you need to do now with long-term vision and strategy.