General Mills Boosts Earnings by Raising Prices

by Justin Grensing, Esq., MBA

 

Where to price products and services is a key part of any business’s marketing and finance strategies. Economic theory includes multiple strategies for pricing, depending on broader business goals. For example, a company looking to maximize profit will try to set its marginal revenue—the revenue received from one additional unit of sale—equal to marginal cost (the cost associated with one additional unit of sale). A company trying to maximize sales will focus on average costs and revenue. The point where they meet is the sales maximizing point.

Of course, these are economic theories, and how these strategies play out in the real world is anything but certain.

Occasionally, however, companies will adjust their pricing strategies. This gives us the opportunity to look at some real-life applications of those theories. General Mills and its increase in pricing on several of its products is one example.

Sometimes Raising Prices Makes Sense

As Paul R. La Monica writes in an article for CNN Business, “General Mills, the owner of supermarket staples Cheerios, Haagen-Dazs ice cream and Progresso soup, said Wednesday that its latest earnings topped forecasts—largely because of higher prices.” Although General Mills saw actual sales volume drop in North America and Europe, sales did rise in Asia. But the move was more about increasing profit than maximizing sales (think back to the two examples of economic pricing theory from above). “General Mills needed to raise prices to protect its profit margins, which were threatened by rising dairy inflation,” writes La Monica, citing Chief Financial Officer Donal Mulligan. The company owns Yoplait, the yogurt maker.

Some Brands Demand More

“It also helps to have some brands that people are willing to pay higher prices for,” La Monica adds. “Although overall sales volume fell in the United States, General Mills still has several well-known brands that are very popular with consumers.” These include Fiber One, El Paso and Pillsbury, among others. In other words, General Mills is able to charge a premium for these products due to the strength of the brand name and customer loyalty.

Are You Considering Economic Factors?

Economic theories on pricing are conceived in a vacuum that doesn’t exist in the real world. Competitor responses, consumer tastes, and a host of other factors influence sales. It’s often hard for even the most sophisticated companies to predict how economic pricing theories will work in practice. For General Mills, the decision to raise prices turned out to be a smart move.

How do you consider economic factors when pricing, or adjusting the prices, of your products and services?

 

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