The big idea: H.J. Heinz Co. was reevaluating the product line of its most profitable product, Heinz tomato ketchup. Recent research suggested people ate more ketchup when they had bigger bottles at home. While the sale of larger bottles was beneficial to Heinz, the bottles also took up more space and were harder for grocery store personnel to stock. So store managers might resist them. What assortment of ketchup sizes should Heinz offer, and at what prices? And how should this be aligned with the incentives of retailers, many of whom were marketing their own private-label products?
The scenario: Two marketing concepts were important to Heinz’s analysis. Retail pass-through is a measure of how much of a manufacturer’s promotional dollars actually make it through to the consumer after the retailer takes its cut. Heinz might offer a dollar-off promotion, of which the retailer might keep 50 cents and pass on 50 cents to the consumer. Pricing and promotions of Heinz products had to make sense to retailers and to Heinz. When the popular “Red Rocket” 24-ounce size of Heinz ketchup was the subject of 99-cent promotions, both Heinz and retailers lost money — but retailers might gain elsewhere with increased foot traffic and sales of other products.
The consumption-adjusted margin could model whether selling a larger bottle would increase ketchup consumption — and thus overall sales. This represented a subtle shift from thinking about profitability at the product level to thinking about profitability at the customer level.
The resolution: Heinz worked with retailers to understand how the smaller sizes of ketchup, particularly the 24-ounce Red Rocket, eroded profitability for all — because profitability on a per-customer basis was higher with the larger bottles. It emphasized the mutual benefit of offering larger sizes. The 24-ounce Red Rocket was phased out, despite its overwhelming popularity, and gradually replaced by the larger bottles that yielded greater per-customer profitability and category growth for both retailers and Heinz.
The lesson: Examining profitability across a product line, particularly in a supply chain, can be complex. Communication and aligned incentives can help, with one result being a lessening of waste associated with retailers attempting to game the system by over-ordering during promotions and under-ordering when overstocked.
It’s critical, when designing promotions, to think through the long-term marketing implications of a product and promotion that is not only overwhelmingly attractive for customers and retailers but that also threatens per-customer profitability. Balancing short-term benefit against long-term category growth is essential.
Wilcox is a business professor and associate dean of the MBA for Executives program at the University of Virginia Darden School of Business. Goldberg is a Darden alumna (MBA ’03), author of “The Lean Anthology” and a management consultant at Goldberg Strategic.