"Innovation-based pricing": new versions of old products at higher prices

Procter & Gamble reported on Thursday that its most recent quarter came in better than expected: net sales went up 4% from the same time a year ago.

Its press release used a peculiar term to describe a tactic that had helped grow its sales: “innovation-based pricing.”

A lot of the tasks that Procter & Gamble products are used for have been around forever —washing clothes or cleaning up spills. The innovation part of “innovation-based pricing” means that the company is creating new products for those tasks.

Take laundry for an example.

“Think about the evolution over time of going from powder detergent to liquid detergent to Tide Pods to now Tide Evo,” said Peter Galbo, head of U.S. consumer staples equity research at Bank of America.

For those unfamiliar, Tide Evo came out earlier this year and is marketed as a super-concentrated tile of detergent.

“Each of those successive steps up is an innovation that would come with a higher price point,” Galbo said.

Some people might not mind measuring out powder detergent for a cheaper price, but others are willing to pay more to toss a tile into their machines and be done with it.

Setting a price for those different products is a discipline unto itself — with its own cast of experts. Like consultant Stephan Liozu.

“I'm a pricing and value thought leader,” Liozu said. He also calls himself a “pricing evangelist.”

Liozu said that over 20% of Fortune 500 companies have dedicated pricing teams.

“All they do all day is pricing strategy and pricing tactics,” he said. “It's a kind of a niche function. But the profit and the impact that they generate in companies is tremendous.”

Those teams can help companies avoid the pricing strategies that leave customers feeling bad, like shrinkflation — shrinking the amount of product but keeping the price the same.

“That’s clearly a downer for consumers,” said Tal Gross, a business professor at Boston University. “No one likes that. Another alternative is just to simply raise your prices.”

Gross said that with innovation based-pricing, customers feel like they’re getting something new for their money — even while they’re doing an old chore like laundry.