The art and science of product pricing

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1:03Melissa Daniels:Hello, and welcome to the Modern Retail Podcast, our show that covers the ways the retail industry is changing and modernizing. I'm Special Projects Editor, Melissa Daniels. In this economy, shoppers' main focus is getting the best value product for the best price. And for brands, that's a tall order when the cost of goods is going up thanks to tariffs and inflation. To get inside how brands are rethinking pricing, I sat down with the President of Learning and Development at Newell Brands, Chris Malkowski. She oversees operations for a number of brands, including the 100-year-old baby company, Graco.

1:40Melissa Daniels:Last year, tariffs forced some price increases, but Graco absorbed much of the 20 to 30 percent impact instead of passing it all on to consumers. Then this January, they announced they were rolling back prices to an average decrease of about 4%. Now most Graco products are priced lower than they were in late 2023, which isn't something many brands can say. Chris explains how they pulled that off, thanks to smart inventory management and detail-obsessed design processes. Even the color ink used on a package can determine how much a customer pays. And Chris also explains how the rapid advancements in AI is rewriting the pricing playbook.

2:20Melissa Daniels:This episode also ties into a new offering we're launching at Modern Retail, the Supply Chain Weekly Newsletter, curated by yours truly. Every Monday, expect news in your inbox about the latest hot topics affecting how products are made and moved around the world, plus in-depth insights from brand experts. The best part? It's free. Sign up today at modernretail.co. And with that, here's my conversation with Chris.

2:53Melissa Daniels:All right, Chris, great to speak with you today. Thank you so much for making the time. Oh, thank you for having me on your podcast. Take me back to, you know, about a year ago when tariffs were first being announced. What was the supply chain situation with Graco? And what was your exposure like when you first started to hear about the tariffs?

3:16Kris Malkoski:At the point where President Trump was elected and he had campaigned on tariffs, we said we need to bring more product into the U.S. on faster timing so that we could have the lowest cost product before tariffs started. So we increased the amount of inventory that we were carrying. But then after the tariffs started going into effect, they went all the way up to 145 percent during a point in time. And we had a learning from COVID about what happens when you stop manufacturing plants that I did not want to have a second experience with. And what we learned during COVID was that if you stop manufacturing, the Chinese employees, and many of them live on campus, they will return to their homes and their homes could be up to a thousand miles away.

4:10Kris Malkoski:And so when you start a plant back up, you have about a three month ramp up time to get the skills and capabilities back in place because you're usually ramping up new people. So I immediately called my manufacturing suppliers in China and I said, let's not stop manufacturing. I know tariffs at 145 percent. Let's rent a warehouse so we can keep the trained employees working so they don't feel like they have to go back home because they aren't making any money. and we'll just put the product in the warehouse because I figured 145 % tariffs couldn't last forever because all other brands and products like Christmas supplies wouldn't ship during 145 % tariff.

4:58Kris Malkoski:And I knew that it would be coming back down. So the moment it came back down, we took the product out of the warehouse, put it on boats and shipped it back to the US so that we could continue to provide supply to parents. Right.

5:12Melissa Daniels:I love this idea of sort of having the foresight to know that you didn't want inventory to stop being made altogether, because it sounds like you had learned that that can be a serious interruption to business.

5:27Kris Malkoski:Oh, it can be. And what we saw with some of our competitors who stopped manufacturing, they went up to 28, 30 % out of stocks in the second half of the year. So the product wasn't available for the parents.

5:42Melissa Daniels:This is why I think Graco is a great brand and case study for this conversation, because you've been known as an accessible price point with a great value for parents for decades now and very familiar brand name that people see on shelves. So when you were thinking about how tariffs were going to affect pricing, what was sort of your North Star? And then where did you land on how much you could absorb or what you needed to pass along?

6:09Kris Malkoski:Yeah. So what we tried to do is to not pass any price along that we could afford not to. And we worked with our suppliers to also help identify productivity savings that we could utilize to continue to sell our product without raising price. And we actually ended up in a pretty good place. The tariffs were 30 % once they settled down until early January when they rolled back to 20%. But with that 30%, we were able to only price on average 11%. And we did a lot of research to make sure that where we strategically priced, we were offering a price that consumers felt was affordable. What's really amazing though, is that versus some of our 2023 end of year pricing on some of our key lines, we actually were able to have a lower price with the tariffs in effect.

7:12Kris Malkoski:So like our Turn to Me car seat, it costs$449 MSRP at the end of 23. Today, it's$399. So it's actually$50 lower. Same with our Forever Deluxe, which declined by$10. And on some of our other key runners or high selling items, we were able to only price like$5 or$10 higher. because what we knew was really important. We do a lot of research. We are constantly testing what price elasticity, what productivity we can put in place to really get to a maximum value for the consumer, for the benefits and quality and safety that our products offer.

8:00Melissa Daniels:Yeah, I feel like that's a really good segue into a part of what you mentioned that I'm really fascinated about. And that's the research that you and your team do to look into price elasticity and where are consumers comfortable? What are their top priorities? What are they willing to spend for that? What kind of listening tools or research tools do your team deploy to really understand your consumer?

8:27Kris Malkoski:That's a really great question. And I would use the phrase, it takes a village to get to the optimum car seat for parents and for the children that are in the car seats. So it all starts with identifying the unarticulated unmet need. Consumers can't necessarily tell you what they don't have, but when you can identify it through observational research, watching parents put babies in and out of car seats, et cetera, that's when you can identify an unmet need, such as having a sliding car seat for moms who've had C-sections who can't lift that car seat out of the base. We do early on research to identify these unmet needs.

9:13Kris Malkoski:Then we work with our R &D engineers, our quality folks, and we really try to prototype what a new design could look like to address this unmet need. We take those prototypes back into research with consumers, some qualitative. As we build out a working model, We can go into quantitative research where we understand what are the primary needs and benefits that consumers are looking for. In the baby gear category, particularly with car seats and strollers, they are looking for safety, number one. Number two, they're looking for high quality performance because car seats are used for a number of years.

9:55Kris Malkoski:You know, we have growing car seats for, you know, ages six months all the way up to age seven, eight years. And then they are looking for convenience, which is why turning car seats, for example, have become so highly popular. And the final thing they're looking for is baby's comfort. So those are the things then in qualitative research. Once we have defined claims we can make, defined product deliverables, we then go into pricing research to understand where the price point is too high or even, and I know this may sound crazy, is too low such that parents think it must be crappy. It must not work.

10:40Melissa Daniels:Yeah, it's like suspicious if something's priced too low. Yeah.

10:43Kris Malkoski:And finally, then we'll go into in-use experience and testing. And if that all works out and the manufacturing runs are successful and deliver against the product feature benefits that we've identified, we'll launch it into the marketplace.

11:00Melissa Daniels:When you talk about some of that research that gets done on your prototypes, what kind of testing do you guys do internally? And I imagine that's part of sort of where your costs are coming from.

11:16Kris Malkoski:Well, yes and no. We do very important research internally. We have a testing facility based in Atlanta, in Sandy Springs, Atlanta, that simulates car crashes at all different speeds. And so when we have a final version of a car seat, we will put a test dummy. And our test dummies come in all shapes and sizes from a newborn all the way up to a 10-year-old. Each one costs over$100 ,000 and they have sensors. So they're strapped in this car seat and then you simulate a car crash at 50 miles an hour. It could be a front facing car crash. It could be a side impact car crash. And we watch the monitors on these test dummies to ensure that the baby stays safe.

12:09Kris Malkoski:You know, if its legs kick up, that we have the right angle on the car seat so that the legs come down gently back into the car seat. We do this, these simulations probably 10 times a day at all different weights and sizes of babies and all different car designs and crash types. And I'm happy to say that it's kind of, it's emotional at times. I get letters from parents who have been in very, very bad crashes, but they show the picture of the car seat and they are holding their baby or their toddler and the child was perfectly safe in the crash. And that's what I'm most proud of making Graco products.

12:52Oh, yeah.

12:53Melissa Daniels:I mean, I imagine when you get a letter like that, it just makes you sit down and remember how everything you're doing and every decision your teams are making are like kind of leading up to that moment. right? You know, it's like it all is going somewhere. Even though it might be the minutia of figuring out which warehouse to rent or, you know, which line to dial up, which line to dial down. It feels so kind of logistical and assembly line. But really, it's about at the end of the day, the product being the best product it can be. And I like thinking about things that way. Given the scope of Graco and what a large operation it is, I'm curious if you can talk a little bit about the different teams and the sort of org chart that plays a role in making sure products are ready for prime time and ready to meet a certain price point.

13:46Kris Malkoski:Yes. This is my village I was talking about. So, it all starts out with the brand teams. We are a brand management organized company, which means the consumers and needs are what drives every decision we do. So we have a research team. It's called Consumer Insights Group. We have the brand team. They go out and they do a lot of observational research to try to understand what are the compensating behaviors? What are the unmet needs? They look at a lot of posts and chats to see what people are complaining about, for lack of a better way to describe it. And they come up with ideas for products. Then they sit down with the R &D team.

14:38Kris Malkoski:And within R &D, we have chemists. How do you get to easily washable fabrics, et cetera? We have design people. How do you get to an aesthetic design that is most appealing to consumers? We have quality engineers. How do you ensure quality is built in? We have regulatory people because like the baby category is highly regulated to keep children safe. We have our legal team to make sure that as we're working on all this, we aren't violating any NHTSA, National Highway Institute rulings, et cetera. They all come together along with the actual engineers that design the products and they create these prototypes that we then get in front of consumers again for more reaction, more response.

15:28Kris Malkoski:Once we're through the whole development piece, we then partner with our manufacturing partners. So you have teams that try to find the lowest cost, highest quality materials, whether it's fabrics, whether it's the steel tubing on a stroller, whether it's the rubber for the tires on the stroller. And you have the actual on-site manufacturing teams, which have quality people, you know, line supervisors, et cetera. But let's assume we get through all of that. We have packaging engineers who have created the die lines for the packaging, and we have graphic personnel who figure out what's the right thing to say on the outside of the package to make it easiest to shop.

16:17Kris Malkoski:And then we have our MD &P, Market Development and Planning Team, that takes what the benefit is and looks across the kind of customer groups. So whether it's mass, whether it's club, whether it's online, to determine what's the optimum assortments for those various retailer venues. And then we have the sales team that takes all of that information that we put into easy-to-consume decks to talk to our buyer, but to show our expertise and leadership within the categories we play in to sell into the consumer. And then we have our teams that put product in the distribution centers and try to get full truckloads of all of the new brands out to the local DCs for our customers.

17:08Kris Malkoski:Like I said, there are so many people involved that touch a product by the time the consumer buys it and takes it home. I don't think anybody realizes.

17:17Melissa Daniels:No, and I'm fascinated by this process. I also like that you mentioned that, you know, working with your manufacturers is a key piece of this, you know, especially on that product assembly, putting it together for the first few times, because to me, that's a part of the tariff conversation that's really been a big challenge or opportunity for a lot of brands. Because when you hear some companies say, oh, we're just going to find another country or, oh, we'll try to find somewhere else to manufacture things, it's not that easy if you've got a company you've been working with on your products for 20 years to just go somewhere cheaper.

17:54Kris Malkoski:That's exactly right. And Newell or Graco does stand for high quality. We have the highest quality rating of any of the brands. So it's really particularly important. But there's even little things like when we designed a new stroller, maybe we want to have the spokes on the wheel bend a little bit differently. And all of a sudden we find out it slows down the manufacturing line and it means it's going to cost a dollar more at retail for the consumer. And it's like, but the consumer will not care that the spokes are bending in a different direction. So we'll revise it in the development process to make sure we are having the maximum speed on our manufacturing lines.

18:36Right.

18:37Melissa Daniels:I love that example, too, because it shows how along the way in that process you described, there's always sort of the price point conversation. And if we make this decision, does it change? If we make this decision, does it go up? If we make this decision, is it neutral? And that sort of each of those teams as they're looking at materials, construction, packaging, they're probably all sort of doing that math along the way.

19:00Kris Malkoski:Oh, we are. We are. And it can be as small as do we put three colors or four colors on our packaging? and what does each new color mean in terms of cost adders. And seriously, we did significantly upgrade the color and effect on our packaging about a year ago because we were so brown and cardboard-ish, we were kind of receding at retail and we now have much stronger packages. But we figured out a way it was going to cost$8 more per large car seat to have four-color printing. We figured out a way working with our manufacturer to execute it in stronger cardboard so the item wouldn't get damaged en route.

19:48Kris Malkoski:And we ate up all of the$8 of cost that initially it looked like it was going to do so that we passed nothing on to the consumer.

19:57Melissa Daniels:Oh, that's interesting. Just by using a stronger cardboard material that the cost would have neutralized. Yeah, and figuring out how to package

20:06Kris Malkoski:it differently and how to even bring the cardboard sides together. We were able to cut out costs so we could show up with higher impact without passing any cost on to the consumer. Wow.

20:19Melissa Daniels:I think that's a really great example of sort of the kind of, not trade-offs, but the decisions and the kind of analysis that you and your team can do behind the scenes on, okay, hey, like, well, if this is really important to us, what are other priorities that maybe can shift a little bit or what are other things that we can shave a few costs so we can make up for it here, but wind up being neutral?

20:45Kris Malkoski:That's right, that's right. And it's working on Graco. I mean, our share was up 160 basis points last year, but each quarter it went up more and more and we ended Q4 up 360 basis points, which I have rarely seen in all my years of working on brands. And I've worked on a lot of brands.