The Importance of Pack Size in CPG E-commerce
If one thing is true about the last year, it’s that e-commerce has inserted its disruptive character into just about every conversation regarding the CPG industry. Once purchased almost exclusively in physical stores, CPG products have now moved into the forefront of a digital battleground.
In fact, 90% of the retail growth in the industry has come from the digital channel. This dynamic growth demands any brand to reexamine all of their fundamental business pillars, regardless if they have worked for decades.
One of the most common mistakes CPG brands make is that they believe physical retail success can be directly and easily translated into online success. This misunderstanding leads to brands selling the exact same pack sizes and product configurations online as they do offline.
Often, this results in major problems in relation to both margin and customer experience due to a lack of consideration for consumers’ online buying habits. Legacy CPG brands that have experienced early successes online understand that optimizing package sizes are a crucial part of a sound e-commerce strategy.
Unit Economics 101
What is more important than margins in CPG business? Truth is, optimizing your pack sizes for e-commerce can have a huge affect on your bottom line. When a brand sells the exact same offerings online and offline, it is usually a playbook for compressed margins. E-commerce has additional layers of costs that can hurt unit economics compared to wholesale relationships with FDMC retailers. The sheer nature of CPG products being consumed quickly and priced at a relatively low level is counterintuitive to being able to absorb these additional direct or indirect cost layers.
To be effective, CPG brands need to look at margins in three different but interlinked ways:
Goal: Increase operating margins
E-commerce comes with an additional cost layer for CPG brands due to the increased price of sending parcels to individual consumers and smaller shipments to pureplay online retailers. A brand must be able to neutralize these additional costs by increasing its pack sizes.
- E-Commerce Partner
Goal: Increase partner’s dollar/unit margin
One of the easiest ways for a brand to increase dollar/unit margin is to sell more quantity per sellable unit. This helps online retailers spread logistics costs across a higher average selling price.
- End Consumer
Goal: Lower the per unit pricing
Because of the increased purchasing frequency of CPG products, brands must have a proper all-in pricing strategy that considers the expected per unit pricing of CPG products, including shipping.
Can Bigger Pack Sizes Be Problematic?
In the previous section, you likely noticed that increasing pack sizes seemed to be the answer to all the margin problems. Fact is, there is a possibility that increasing pack sizes too much can also hurt your bottom line. In CPG e-commerce, there is not a one-size-fits-all model for pack size and associated total unit pricing.
One variable to consider is the product’s usage rates, as it makes more sense for consumers to purchase larger pack sizes for items that are consumed relatively quickly. For example, the average person is likely to consume a 20-ounce bottle of Gatorade faster than a 20-ounce bottle of mustard. Both products have challenges with pure-play e-commerce fulfillment, as they are heavy and have a low per-unit cost. However, Gatorade would be best sold in a 12 or 24 pack, while most customers probably don’t need 12 or 24 bottles of mustard.
Because of this, CPG brands should take the following steps to determine what pack size is best for e-commerce:
- Survey current customers or create focus groups of potential customers to determine the ideal combination of pack size and pricing.
- Use a marketplace like Amazon to test various iterations of pack size and pricing.
- Look at your closest competition on internet retailers to see what pack size and pricing combinations are working best for that product category.
Online CPG Purchasing Habits
There is a bit of a “catch-22” argument that surrounds online CPG purchasing habits. On one hand, CPG brands and their e-commerce partners need pack sizes to be bigger to avoid a “CRaP” (“can’t realize a profit”) situation. On the other hand, even though consumers have been purchasing single CPG items in stores for years, there is a substantially higher proportion of larger pack sizes available online, which naturally creates a higher probability of “stock up” trips, or purchases made in bulk.
According to Nielsen’s June 2018 Total Consumer Report, tendencies to purchase in bulk online have likely driven the 7.3% growth YOY in FMCG units purchased per trip (the highest of any channel), while dollars spent per trip have fractionally contracted.
Image Source: Nielsen
Though all CPG categories are different, if we look at snacks, which is one of the most popular online grocery categories, 27% of online orders were considered stock up trips. Furthermore, if we take a snapshot of Amazon’s 25 best-selling snack foods, a majority of the products have pack sizes that are significantly larger than their in-store counterparts.
In sum, larger pack sizes for certain high-consumption items provide both consumers and manufacturers more bang for their buck.
Variety Packs Create Wins
Online shoppers might be “stocking up” more in categories with high usage rates, but buying in bulk and being exploratory and open-minded aren’t mutually exclusive. Shoppers are turning to variety packs to satiate the desire to try new products, particularly within grocery categories. Looking at One Click Retail’s list of the best-selling school snacks in the first half of 2018, 50% were variety pack offerings.
Image Source: One Click Retail
Similarly, if we take a snapshot of Amazon’s best-selling coffee beverages, several of the top 25 are variety pack options.
As the digital channel starts to mature for CPG products, e-commerce partners like Amazon will continue to put more pressure on brands to introduce profitable pack sizes. Too often, CPG brands list products online that mirror their offline offerings. This creates challenges with profitability, as e-commerce has additional cost layers related to fulfillment. CPG brands should view this as an opportunity to develop offerings designed for success in e-commerce that also meet the changing buying behaviors of online shoppers.