The document discusses strategic pricing and summarizes key lessons from pricing research. It finds that price has a greater impact on profits than other factors like costs. Setting the right price is important to influence sales volume, revenue, and profitability. Pricing research shows consumers are more sensitive to price decreases than increases. Promotions are on average 60% more effective at driving sales than price decreases. The type of promotion framing and tier distances impact effectiveness. Frequent promotions can increase fragility in terms of regular price and promotion sensitivity over time. In summary, strategic pricing research is important to set optimal prices, understand consumer sensitivity, and maximize profits through effective promotional strategies.
3. Price lever has approximately a 10:1 relative
impact on operating profit
3
Financial Lever McKinsey (1992) A.T. Kearney (2000)
Price 11.1% 8.2%
Variable cost 7.8% 5.1%
Sales volume 3.3% 3.0%
Fixed cost 2.3% 2.0%
Average impact of a 1% improvement in different levers on operating profit
4. Pricing in the organization: key takeaways
• Better management of pricing is the fastest and most cost effective way
to increase profits
• Value pricing is the most customer-centric approach and most realistic;
taking competition into account
• It’s critical to include customer value, competition and costs into your
pricing model
• Different stakeholders do have different interest and will elaborate and
interpret the outcomes differently
• Different methods generate different outcomes
4
5. When to do pricing research?
Price should be assessed throughout the new
product development funnel and beyond…
5
1
Idea
generation
2
Idea screening
3
Concept
development
4
Business
opportunity
5
Product /
Package test
6
Technical
implementation
7
Commercial
implementation
Successful
market
introduction
Product innovation funnel
Idea stage
•Assess competitive
landscape
•Ballpark range of
wtp
Development stage
•Price maximizing trial
•Price maximizing repeat
•ROI financials
Commercial stage
•Portfolio pricing
•Distribution channels
•Pricing policy
Post launch stage
•Price tracking
•Strategy compliance
6. 6
2 Basic types of pricing research methodologies
Rear View Forward Looking
Based on historic point of sale data Based on ad-hoc research
7. Rear View pricing methodologies
• Examples:
1. Marketing mix modeling
2. Store level modeling
3. Consumer tracking studies
• Pros & Cons
If detailed data is available (weekly, by store), rather accurate model of what happened in
the past
Data often not available
Limited to events from the past
Rarely accounts for changes in price sensitivity due to e.g. changing economic cycles (e.g.
inflationary periods), new market developments (e.g. new competitive entries), or
increased brand equity.
7
8. Forward looking pricing methodologies
• Van Westendorp Price Meter
• Looks for more than just Price Willingness to Pay and is able to identify optimal price
points. But:
» Does not take competitive products into consideration
» Is very cognitive (not intuitive)
• Choice-Based Conjoint
• Intuitive method that takes competition into consideration - is therefore very appropriate for
products that are in a competitive market
• Changing other product characteristics is also possible, which provides possibilities for
portfolio management or different executions of price changes (e.g. via pack size changes)
8
10. 10
Meta analysis of past pricing studies: 5 lessons
1. Sensitivity to down pricing is higher than to up pricing
2. Price tier distance drives trading up
3. Category matters more than country
4. Primary shopper profile impacts price sensitivity
5. Consumers are more sensitive to price changes than to pack size
changes
11. 1 - Sensitivity to down pricing is higher than to up
pricing
11
Base case
price PBC
PS Mean SD
Down -1.64 1.76
Up -1.10 0.68
-20%
20%
-10% 10%
SKU-level price change
Changeofdemand
12. 2 - Price tier distance drives trading up
12
Small Medium Large
Tier distance
Lower
Higher
Tier
Down-trading
Up-trading
Up-trading
Down-trading
Up-
trading
Down-trading
13. 3 - Category matters more than country
13
0 0.5 1 1.5 2 2.5 3
Dishwashing detergent (3)
Shampoo (3)
Razors and Blades (3)
Diapers (9)
Female care (9)
Laundry detergent (8)
Pet food (3)
Down pricing
Up pricing
SKU-level
price
sensitivity
14. 3 - Category matters more than country
14
0 0.5 1 1.5 2 2.5 3
Italy (7)
Germany (19)
Spain (13)
UK (20)
Russia (6)
France (8)
Netherlands (9)
Down pricing
Up pricing
SKU-level
price
sensitivity
15. 4 - Primary shopper profile impacts price
sensitivity
15
0.0 0.5 1.0 1.5 2.0 2.5
Hyper/super
markets
Specialty
channel
Discounter
channel
Down pricing
Up pricing
0.0 0.5 1.0 1.5 2.0
Women (45)
Men (8)
Down pricing
Up pricing
16. 5 - Consumers are more sensitive to price
changes than to pack size changes
16
-20%
20%
-10% 10%
<- Down-pricing / Up-sizing Up-pricing / Down-sizing ->
Changeofdemand
Pack size changed Price changed
17. 17
Meta analysis of past promotion studies: 5
lessons
6. A promotion is on average 60% more effective than a price decrease.
7. Explicit price discount (in % or in cash) is most successful in driving
sales
8. For premium products framing promotions in cash discount has a
greater effect than percent discount.
9. Tier distance is critical when using promotions to trade up consumers.
10. Frequent promotions make products more fragile in terms of regular
price and promotion sensitivity.
18. 6 - A promotion is on average 60% more
effective than a price decrease.
18
1
2
0% 10% 20% 30% 40%
% discount/price decrease
volumeshareindex
Promotion
(slope = 2.0)
Price decrease
(slope = 1.0)
19. 7 - Explicit price discount (in % or in cash) is
most successful in driving sales
19
Promotion type Rank
Percent discount 1
Direct
Cash discount 2
From-To 3
Implied
Now for 4
Multi-unit price 5
Additional pack 6
Larger pack 7
20. 8 - For premium products framing promotions in
cash discount has a greater effect than percent
discount.
20
0 0.5 1 1.5 2
Relative expensiveness
Promotioneffectiveness
Cash discount
Percent discount
21. 9 - Tier distance is critical when using
promotions to trade up consumers.
21
Low tier
distance Promotions
on tier 1
brand
Consumers
move to tier 1
OutcomeStrategySituation
High
Mid
22. 10 - Frequent promotions make products more
fragile in terms of regular price and promotion
sensitivity.
22
Note: The graph will
be different for
individual product
groups
0% 20% 40% 60% 80%
% of time on promotion
Low
HighSKUprice
sensitivity
0% 20% 40% 60% 80%
% of time on promotion
Low
HighSKUprice
sensitivity
23. 10 - Frequent promotions make products more
fragile in terms of regular price and promotion
sensitivity.
23
0
1
2
3
10% 20% 30% 40% 50% 60% 70%
% of time on promotion
Promotion
effectiveness
0
1
2
3
10% 20% 30% 40% 50% 60% 70%
% of time on promotion
Promotion
effectiveness
24. Contact us to discuss your pricing strategy
Ji-Hoon Dierckx
P&G Associate Director
Dirk Huisman
SKIM Founder & Chairman
John Ashraf
SKIM Product Owner,
Pricing & Portfolio Management