pricing.gap

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The Price is Right?

Six Steps to More Profitable Pricing

Leveraging Analytics to Generate More Profitable Pricing Strategies and Decisions

New Developments in Measurement and Analytics

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Copyright 2013 Bottom Line Analytics All rights reserved.

Content

Forward, Objectives & Destination

The 6 Step Process

1. Situation Assessment & Set Yield Objectives

2. Do the Analytics

Own Brand Price Elasticity by SKU

Competitive Price Elasticities

Pass-Through Assessment

3. Assess Competitive Response Risk

4. Generate Scenarios & Plan Timing

5. Summarize 6 Principles

6. Optimize Profit Yield

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Forward: The Imperative and Challenge

of Pricing

• Pricing is considered one of the Four-P’s of marketing and a critical

part of the marketing mix

• In fact, no single part of the marketing mix has as much impact on

sales performance and profitability than pricing

• Yet, managers tend to spend less time and research on improving

pricing decisions and, likewise, are less knowledgeable of the

specific impact that individual pricing decisions have on their

brand’s performance in advance of a pricing action

• Consequently, sub-optimal pricing decisions are common and

managers literally leave millions of dollars of profit and revenue on

the table due to poor pricing decisions

• Pricing analytics has a huge upside and is a relatively easy sell, if

done correctly.

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Pricing research and analytic approaches

• The following three approaches are the most used methods for addressing

issues of pricing, price sensitivity and pricing strategy for marketers.

Method Description Advantages Limitations

Von Westendorp Method A survey tecnique which seeks to find the For providing price guidance for new products, Based on perceptions and not on actual mar-

intersection between "perceived too expensive" `` ket behavior.

and "too cheap to be of adequate quality". perience or data.

Conjoint/Discrete Choice Based on trade-off surveys; where price is paired Great for new products and linking price to Provides share or preference simulations, but

Models with various product features and attributes. value-added product features and attributes. also is not linked to actual purchase behavior

Econometric Models Based on statistical linkage or retail prices to actual Requires sufficient historical price and end- Best for existing products and does provide the

product sales. user sales data. Greater uncertainty when critical linkage with actual customer sales or

pricing decisions are outside the range of behavior.

historical experience.

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Objective

• In order to adequately plan, evaluate and implement

profitable pricing decision, managers must have a

precise understanding of the sales and profit impact of

given price changes. This will require development of

advanced models or analytic tools which measure:

• Brand or Own Product Price Elasticity, which is the

percent change in brand sales due to a given

percent change in brand price over time, and

• Cross or Competitive Price Elasticity, which is the

percent change in brand sales due to a given

percent change in competitors’ pricing over time.

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Destination

• This outlines a 6-step process that has shown to provide

companies the information and tools needed to make more

profitable pricing decisions

• While not eliminating all uncertainty due to pricing decisions, this 6-

step process will greatly enhance the likelihood that pricing

decisions will be optimized due to:

• Having models and simulation tools that precisely estimate the

impact of any given pricing action on sales, revenue and net

profitability

• Provide intelligence on the likelihood and level of competitive

pricing following your brand’s pricing move

• Provide facts and insight into the best timing for pricing

• Provide the specifics of which SKUs are most critical in the

pricing decision

• Identify which markets or channels where your brand’s price is

not in competitive alignment and what can be done about it

• Uncover the key principles for effective pricing strategy

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Content


The 6 Step Process


2. Do the Analytics








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1- 3 Plan & Assess

4- 5 Prepare

6 Optimize

Assess &

Set Yield

Targets

Situation &

Objectives

Model

Price

Elasticities

Analytics Competitor Response

Evaluate

Risk

When & What

to

Implement

Generate Scenarios & Plan Timing

Consolidate InsightsSummarize

6 Principles

Profit

YieldOptimize

A Proven 6 Step Process

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Content


The 6 Step Process


2. Do the Analytics








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Step 1 Situation Assessment & Objectives: Review Sales Trends

80

85

90

95

100

105

110

115

120

125

130

Market 1 Market 2 Market 3

Standardized Index of Sales Trends

Reviewing your current business situation and performance is the

first step for developing pricing goals and objectives. You clearly

need to find the weak links in your business to uncover possible

pricing issues.

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Step 1 Situation Assessment & Objectives: Summarize Key Driver Trends

• Doing a thorough review of yours and competitor sales and pricing trends will

enable you to focus where pricing needs to be leveraged to rectify potential

competitive imbalances. This is the “smoking gun” which shows a pricing

issue in Market 3.

Competitve

Price Trend

Own

Price

Tremd

Sales

Trend

Your

Price

Competitor

Price

Market 1 -5.1% 2.1% 1.3% 45.50$ 43.50$

Market 2 2.1% 4.6% 4.5% 49.50$ 49.00$

Market 3 -14.3% 5.8% -11.3% 52.20$ 48.60$

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Step 1 Situation Assessment & Objectives: Identify Competitive Price Misalignments

Market 3 Sales & Competitive Pricing Trends

Your Brand Retail Sales Trends Market 3 Compet.Price Trends Market 3

Uncovering the problem areas in your business will often reveal issues

with competitive price alignment for your brand. This is an area

where pricing remedies will be front and center

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Step 1 Six Situation Assessment & Objectives: Determining Historical Price Pass-Through

• In markets or channels where your brand’s price is not in alignment with competitive

brands, it is not uncommon to find less than 100% of prior pricing actions being totally

passed through to the end customer. This is certainly the case with Market 3

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Your

Price

Pass Through

Now

Pass Through in

6 Months

Market 1 4.4% 4.1% 4.5%

Market 2 7.0% 6.1% 8.2%

Market 3 8.1% 3.4% 7.3%

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Step 1 Situation Assessment & Objectives: Set Yield

Objectives

• At the core of every pricing action is a trade-off between

sales growth and improving profitability.

• Every pricing action starts with specific volume sales

objectives and profit yield estimates consistent with

profit goals.

• These goals are actualized through careful planning,

estimating and execution. The analytics we will be

doing is specifically aimed towards an accurate

estimate of the sales growth and profit impact or yield

due to the desired pricing action.

• Every pricing decision is the culmination of an effective

balance between competing sales growth and profit

goals.

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Content


The 6 Step Process

Situation Assessment & Set Yield Objectives

Do the Analytics




Assess Competitive Response Risk

Generate Scenarios & Plan Timing

6 Principles & Optimize Profit Yield

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Step 2 Analytics: Sales Model Architecture

Brand

SKU

Price

Comptv.

Price

Macro-

Economic

Season-

ality

Weekly Retail

Sales by

Market

Determining Price Elasticities starts with a Predictive Econometric

Model of Brand Sales

Weekly Retail Sales

are driven by

Brand SKU Price

Plus

Competitor’s Price

Plus

Macro-Economic Factor

Plus

Seasonality

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Step 2 Analytics: Sales Model Validation

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Actual

Model

Models show an excellent predictive fit to actual sales

R2 =97.3, Holdout R2 =89.9, MAP = +/- 1.9%

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Step 2 Analytics: Derive Own Brand Price & Profit

Elasticities with and without Competitor Reciprocation

1.08

1.10

1.12

1.14

1.16

1.18

1.20

10.0

12.0

14.0

16.0

18.0

20.0

22.0

-15% -10% -5% 0% 5% 10% 15%

Un

it S

ale

s M

il

Net

Pro

fit

Mil.

Price Change

Profit Mil wo Reciprocation

Profit Mil w Reciprocation

Unit Sales Mil wo Reciprocation

Unit Sales Mil w Reciprication

When competitors match Brand price changes, it reduces the impact

from that pricing change

Brand Price & Profit Elasticity

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Step 2 Analytics: Retail Sales Variance Drivers: Annual Unit

Sales Trend Due To:

4.5%

1.3%

-11.3%

-1.0%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

Market 1

Market 2

Market 3

Total

2012 Sales % Impact

Competitor Pricing

Your Brand's Pricing

Macro-Economic Impact

Base Momentum

From the econometric model, we can determine the impact of different

drivers and pricing on overall performance. The problem Market 3

is the one area dragging down overall brand growth

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Step 2 Analytics: Pricing Impact on retail unit sales

by SKU

0.1%0.1%0.2%0.2%0.2%0.2%0.2%0.2%0.5%

1.6%2.5%3.2%

5.4%7.2%7.3%

9.7%25.7%

35.2%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

SKU 1

SKU 2

SKU 3

SKU 4

SKU 5

SKU 6

SKU 7

SKU 8

SKU 9

SKU 10

SKU 11

SKU 12

SKU 13

SKU 14

SKU 15

SKU 16

SKU 17

SKU 18

Retail Unit Sales Impact % Due to Pricing

Retail Sales Impact %

BLA models pricing elasticity at the SKU level, where pricing decisions

are made. Evidence usually shows that a relatively small proportion

of a brand’s SKUs drive most of the pricing impact.

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Step 2 Analytics: Pricing Impact of SKU’s on brand

net profit

-1.5%0.0%

0.9%1.3%1.3%1.5%

2.3%2.3%

3.3%4.4%4.5%4.7%

5.6%7.3%

9.7%13.8%

15.9%22.8%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

SKU 1

SKU 2

SKU 3

SKU 4

SKU 5

SKU 6

SKU 7

SKU 8

SKU 9

SKU 10

SKU 11

SKU 12

SKU 13

SKU 14

SKU 15

SKU 16

SKU 17

SKU 18

Net Margin Yield Impact % Due to Pricing

Retail Sales Impact %

And similarly, a few SKUs tend to drive most of the profit impact due to

pricing

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Step 2 Analytics: Price Elasticity with and without Full

Competitor Price Reciprocation by Market

-0.3%

-0.6%

-1.4%

-0.5%

-0.2%-0.3%

-1.0%

-0.3%

-1.6%

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

Market 1 Market 2 Market 3 Total

Price Elasticity: Change in Retail Unit Sales Due to a 1% Increase in Retail Price

WO Reciprocation Full Reciprocation

Our price elasticity model looks at market/SKU level and with and

without competitor reciprocation of your price change

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Step 2 Analytics: Impact of Housing Starts on Brand

Retail Sales

7,85,000

7,90,000

7,95,000

8,00,000

8,05,000

8,10,000

8,15,000

8,20,000

8,25,000

8,30,000

8,35,000

8,40,000

-15% -10% -5% 0% 5% 10% 15%

An

nu

al R

eta

il S

ale

s

Change in Housing Starts

Housing Starts and Unit Sales

Unit Sales

Our Model is also able to isolate the impact of key macro-economic

drivers

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Step 2 Analytics: Pricing Impact Matrix

• Quadrant Plots visually show which SKUs are the most critical in terms of

pricing

Bubble size represents net revenue

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Content


The 6 Step Process


2. Do the Analytics








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Step 3 Assess Risk: Competitive Price Response

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

09-01-2010 09-01-2011 09-01-2012

Your Brand Price

Competitive Price

Tracing competitor pricing behavior is critical to understanding the

likelihood of full/partial pricing reciprocation and the timing thereof

Full price reciprocation

occurs, but with a 5-8 week

lag.

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Content


The 6 Step Process


2. Do the Analytics








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Step 4 Generate Scenarios & Plan Timing: Generate Pricing Scenarios

$0.86

$1.04

$1.28 $1.14

$1.42

$1.77

$-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

Yield $Mil

Incremental Revenue & Profit Yields from Optimized

Price Scenarios

Revenue 3% Increase

Revenue 4% Increase

Revenue 5% Increase

Net Profit 3% Increase



The final pricing decision is from running various optimized pricing

scenarios and selecting that which achieves profit goals

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Step 4 Generate Scenarios & Plan Timing: Price Elasticity Trends by Period

0.31 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.40 0.41 0.42

Total Elasticity (Absolute Value)

BLA’s modeling approach can identify points-in-time when price

sensitivities are highest and when is the strategically best time to

implement pricing increases or decreases

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Content


The 6 Step Process


2. Do the Analytics








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Step 5 Six Principles: Six Strategic

Principles for effective pricing

1. Setting a Sales & Profit Yield Target: What profit improvement is required? Note that,

with pricing, there is always a trade off with business growth.

2. Evaluating whether your overall price level is in alignment with competitors. Determine

which markets and channels where price misalignment might exist

3. Assessing the likelihood of retail price pass-through. Are retailers passing-through your

price changes to customers?

4. Assessing the likelihood of competitive reciprocation and their timing. Are competitors

matching price changes and is there a lag?

5. Estimating scenarios and optimizing the decision, by SKU. Estimating sales and profit

of different pricing scenarios and putting a plan into place., as well as the best time to

implement pricing decisions.

6. Selecting a pricing level and rate from alternatives and optimizing profit yield

Your

Price

Pass Through

Now

Pass Through in

6 Months

Market 1 4.4% 4.1% 4.5%

Market 2 7.0% 6.1% 8.2%

Market 3 8.1% 3.4% 7.3%

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Content

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The 6 Step Process


2. Do the Analytics








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Step 6: Optimize: Optimized Pricing

A simulation tool which permits us to estimate different scenarios and

optimize profitability within specified targets and constraints, is essential

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Key Summary and Recommendations

Recommendations

• Plan pricing actions in advance.

• Set specific sales growth and profit objectives from pricing

• Evaluate current situation and pricing/sales trends. Identify where there might be

competitive pricing imbalances

• Due diligence by developing analytics for price elasticity

• Analyze prior pricing actions for competitive response, timing and the level of

price pass through from prior pricing actions

• Simulation and optimization tools for evaluating different pricing scenarios

• Analytics to determine the best timing and level of pricing adjustments

• Select & optimize the pricing rate which will generate the desired sales & profit

yield

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