Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Procter and Gamble Prices Everyday Necessities for Profit
Transcript
- Lucas: You know, there's a company that quietly touches almost every household in America, and its pricing decisions move billions of dollars without most people even noticing. Luna: You're talking about Procter & Gamble, right? The conglomerate behind Tide, Pampers, Bounty, Gillette — the list goes on. Lucas: Exactly. P&G does about eighty billion dollars in annual revenue, and their gross margin hovers around fifty percent. That is not easy for a company selling what are essentially commodities — soap, diapers, paper towels. Luna: So how do they command that kind of margin on stuff people barely think about when they buy it? Lucas: That's the question. And the answer lies in a very deliberate pricing machine. Let's zoom in on one specific example: the 2019 price increases on Pampers and Bounty. P&G raised prices by roughly five percent on those lines. A five percent price increase on a product that costs, say, twenty dollars — that's an extra dollar per package. Luna: But diapers and paper towels are things people buy every week. A dollar adds up. Did customers push back? Lucas: That's exactly the risk. Price elasticity for consumer staples is generally low — meaning people don't stop buying diapers when the price goes up a bit — but it's not zero. P&G's data showed that a five percent price increase would cause roughly a one to two percent volume drop. So the net effect is positive revenue growth. But the tricky part is execution. Luna: Because if you just raise the sticker price, people notice. Especially on items they buy every week. Lucas: Right. So P&G uses what's called an 'everyday low price' strategy — EDLP for short. The idea is that the base price is stable, not fluctuating with promotions. That builds trust. But then they layer in targeted promotions — coupons, loyalty discounts, bulk packs — to smooth over the increase. Luna: So essentially, the headline price goes up, but the effective price customers pay can be lower if they clip a coupon or buy the jumbo pack. Lucas: Exactly. And that's the genius. The promotion creates a psychological win for the customer — 'I saved money' — while P&G still captures a higher average selling price across the whole customer base. Not everyone uses the coupon. And the ones who don't — they pay full price. Luna: But isn't that just a fancy way of saying they're raising prices while pretending not to? Lucas: That's one way to look at it. But there's a real argument that P&G's brand equity justifies a premium. When you buy Pampers, you're not just buying a diaper — you're buying the reassurance that it won't leak, that it's dermatologist tested, that it's the brand hospitals use. That trust took decades to build. Luna: And they've also tiered their product lines. You have Luvs at the budget end, Pampers in the middle, and Pampers Swaddlers at the premium end. So if a customer balks at the Swaddlers price, they can step down to regular Pampers — and P&G still keeps the sale. Lucas: Exactly right. Tiering is a core part of their pricing architecture. It captures customers across income levels and makes the premium line feel like a choice, not a gouge. And the cost to produce a Swaddler versus a Luvs is not that different — maybe twenty percent more materials. But the price difference can be forty or fifty percent. Luna: So the margin on the premium tier is significantly higher. That's where the real profit is. Lucas: Bingo. And P&G has been doing this for so long that they have granular data on elasticity at the SKU level — down to the individual store. They know that a Pampers customer in a Target in suburban Chicago will tolerate a three percent increase without flinching, but a customer in a Walmart in rural Ohio might switch to Luvs at two percent. Luna: That level of detail is incredible. But also a little unsettling — you're basically being priced based on your zip code and shopping habits. Lucas: It is. But it's also why P&G has been able to maintain pricing power even as private labels have gotten better. Store brands like Up&Up or Kirkland Signature are often made by the same contract manufacturers. But P&G's brand trust allows them to charge a premium that private labels can't match. Luna: Which brings up an interesting question: how much of P&G's pricing power is brand, and how much is just inertia? People buy the same detergent their mom used, right? Lucas: A lot of it is inertia. But inertia is an asset, not a weakness. P&G spends over seven billion dollars a year on advertising and marketing — that's roughly nine percent of revenue. They're constantly reinforcing those habits. And once you're in the habit of grabbing the blue Tide bottle, you're not comparing prices with the generic next to it. Luna: So the pricing power is really a moat built on habit and trust, defended by data and tiering. Lucas: Exactly. And that's why when P&G raises prices by five percent, they only lose one or two percent in volume. The math works beautifully. Over a year, that couple of percent on a multi-billion dollar product line adds up to hundreds of millions in extra profit. Luna: And it's not just Pampers and Bounty. They do this across the portfolio — Tide, Gillette, Crest, always with that same playbook. Lucas: Right. And it's worth noting that this isn't always smooth. In 2020 and 2021, when input costs spiked, P&G had to raise prices more aggressively — sometimes eight to ten percent. And they did see some volume loss, especially in lower-income segments. But overall, the strategy held. Luna: So what's the lesson for smaller businesses? You can't just copy P&G's scale. Lucas: No, but you can copy the principles. First, build real brand trust — that's the foundation. Second, tier your offerings so you capture customers at different price points. Third, use promotions strategically to manage the perception of price increases. And fourth, collect data on your customers' price sensitivity. Luna: I think the other lesson is that pricing isn't just a one-time decision. It's a continuous process of testing and adjusting. P&G is constantly running A/B tests on price points. Lucas: Exactly. And they've been doing it for over a century. That's the real competitive advantage. Luna: Hey, you know, this kind of deep dive into how companies actually make pricing decisions — that's exactly the kind of thing that listeners tell us moves their own work forward. If you've gotten something out of this episode, even just one idea you can use, that's the whole point of the show. Lucas: Yeah, and we keep the show ad-free because of listener support. If today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. It's the smallest possible ask, and it genuinely helps us keep going. Luna: No pressure, just if it feels right. We're grateful either way. Lucas: So back to P&G — one more thing I find fascinating. They actually use a pricing model called 'cost-plus' internally as a floor, but then they adjust based on willingness to pay. So they know exactly what their cost is, but they don't anchor the price there. Luna: Right, because the customer doesn't care what your costs are. They care about the value they perceive. Lucas: Exactly. And that's the essence of pricing power. It's not about costs — it's about perceived value, brand trust, and the data to know where the sweet spot is. Luna: And P&G has been finding that sweet spot for over 180 years. Lucas: Yeah, they've had some misses — remember when they tried to raise Tide prices too fast in the early 2000s and had to backtrack? But they learn. And that's the final lesson: pricing is a muscle you build over time. Luna: So next time you grab a roll of Bounty, you'll know exactly what went into that price tag. Lucas: And you might even appreciate the machine behind it. Or at least be a little more skeptical. Luna: Right. Thanks for listening, everyone. Lucas: We'll talk again next time.