Style for an orange heading - SKIM...John Ashraf Product Owner, pricing & Portfolio management...

Pricing webinar

John Ashraf

Product Owner, pricing &

Portfolio management

Sharing Best Practices In Pricing Research

About SKIM

> Global pricing partner to many multinational companies

> Over 35 years of rigorous experience in pricing research

> Thorough understanding of the pricing challenges you face

> Innovative frontrunners in pricing research and methodologies

> We deliver actionable results during interactive pricing workshops

200 pricing studies in the past 5 years

18 7000 500 45

Pricing

Price management should involve costs, customer demand (sales), and assessment of competition.

Approach Based on Ignores Liked by

Cost – Plus Costs (+ profit) Competition, customers Finance

Market basedCompetition (vs.

competitor prices)Cost, customers Sales

Value basedCustomers (willingness

to pay)Cost Marketing

Cost – Plus Pricing approach

• Oldest and (still) most popular

approach

• Simple: determine the cost of

each product and add a

markup

• Objective and financially

prudent but...

• Internally focused: has

nothing to do with the market

• May not optimize market

potential, nor profitability

• May lead to distorted prices

over time

+%

Market basedPricing approach

• Based solely on the prices being offered by

competition (or in most extreme cases depends on

supply / demand ratio)

• Commonly applied in commodities

• Does not consider differences or changes in

customers’ value perception across competitors

Value basedPricing approach

• Price is driven by customer value

• Frequently applied in CPG

• Based on customer research

• Heavily restricted by competition

Bottom line, all three factors should be taken into account when managing price

customer

competition costs

price

Different stakeholdersand their priorities

How do I get my

products on the front

row of the shops?

Which features

should the 2015

models have

What will the

impact be on net

contribution?

What will be the

impact on volume?

We must go up 3

share points to

prove leadership

Evaluating your price

Price / value mapping

Understand how customers

perceive products

Explain and predict

market share evolution

Immediately view of your

product competitiveness

Why price / value mapping?

1. Understand how customers perceive products

> Measure value of different product benefits of

products in the market

> Map this out against the sales price

> Draw a “Value Equivalence Line” (VEL) to indicate

whether the price of a product matches its perceived value

Price / value mappingStart with determining the perceived value of product features

Rating (10-pt scale) WeightFast

FoodBrasserie Bistro Luxury

Michelin

Star

Food Quality 20% 3 5 5 7 9

Food Sophistication 25% 1 3 3 5 9

Restaurant Location 5% 5 8 6 4 3

Décor 20% 1 3 5 6 8

Service 30% 3 4 5 7 9

Total score 2.2 4.0 4.6 6.2 8.5

Average price 8€ 16€ 22€ 60€ 75€

Price / value mappingPrice is based on average price for 2-course dinner, excluding drinks.

0 €

10 €

20 €

30 €

40 €

50 €

60 €

70 €

80 €

0 1 2 3 4 5 6 7 8 9 10

Pri

ce

Perceived Product Value

Fast Food

Brasserie

Bistro

Luxury

Michelin Star

Value Equation Line

Why price / value mapping?

2. Explain and predict market share evolution

> Compare products in the market to see if they offer more or

less value vs. the VEL and vs. competition

> If performing lower, the product is a ‘share-loser’. If

performing higher, the product is a ‘share-gainer’

Price / value mappingPrice is based on average price for 2-course dinner, excluding drinks.

0 €

10 €

20 €

30 €

40 €

50 €

60 €

70 €

80 €

0 1 2 3 4 5 6 7 8 9 10

Pri

ce

Perceived Product Value

Fast Food

Brasserie

Bistro

Luxury

Michelin Star

Value Equation Linevalue

disadvantage

value

advantage

share ‘losers’

share ‘gainers’

Price / value mappingWhat if something happens that ‘disrupts’ the market?

0 €

10 €

20 €

30 €

40 €

50 €

60 €

70 €

80 €

0 1 2 3 4 5 6 7 8 9 10

Pri

ce

Perceived Product Value

Fast Food

Brasserie

Bistro

Luxury

Michelin Starold value

new value

Why price / value mapping?

3. Immediately view of your product competitiveness

> For existing products: if performing below competition, a

price change or benefit upgrade may be in order

> For new products: assessing the right price based on the

value map

> Depending on the product costs

> Depending on the position vs. the VEL

> Depending on the position vs. competition

Price / value mappingAdjusting your position

0 €

10 €

20 €

30 €

40 €

50 €

60 €

70 €

80 €

0 1 2 3 4 5 6 7 8 9 10

Pri

ce

Perceived Product Value

Fast Food

Brasserie

Bistro

Luxury

Michelin Star

1

23

Option 1:

improve product value, increase Decor

by remodeling (currently ‘6’) and/or Food

Sophistication by changing Chef

(currently ‘5’)?

Option 2:

reduce prices

Option 3:

a combination of option 1 and 2

Priceelasticity

Price elasticity

Price

Dem

and

Revenue

Δ Demand

Δ PricePS =

P2 P1

D2

D1

Price elasticity

Price

De

ma

nd

Price <

Revenue >

PriceD

em

an

d

Price >

Revenue >

-∞ < PS < -1 -1 < PS < 0

High price sensitivity Low price sensitivity

Example of Price-Demand curve:

20.00

40.00

60.00

80.00

100.00

120.00

140.00

27.95 29.95 31.95 33.95 35.95 37.95 39.95 41.95 43.95 45.95 47.95 49.95 51.95 53.95 55.95 57.95 59.95

Vo

lum

e in

de

x

Price

Depending on what changes in the market, PE can be different!

The more products change in price in tandem, the lower the PE

– Within the same brand: consumers are more inclined to stay

within the brand they like but search for the best deal within the

brand.

– Competitive response: if competition (especially if it is a main

competitor of your brand) changes in price as well, there will be

less incentive to switch

PricingResearch methods

2 basic types of pricingResearch methodologies

rear view forward looking

Rear ViewResearch methodologies

> Marketing mix modeling

> Store level modeling

> Consumer tracking studies

Marketing MixModeling

• Developed in the 1950’s, but very popular in the last ten years

• Uses syndicated point-of-sale data and companies’ internal data

• At least 2 years of weekly data by store is usually recommended

• Estimates the effectiveness (ROI) of each marketing element: TV Ads, GRP levels,

Promotions, Featuring, Price, Distribution, Competitive activities

• Applies regression models on time series (linear and non-linear)

• Price elasticity is usually modeled as one PE figure per brand

• Assumes factors affecting future price sensitivity will remain constant

Rear ViewResearch methodologies

Pros

> If detailed data is available (weekly,

by store), rather accurate model of

what happened in the past

> Excellent tool to determine ROI on

marketing efforts

Cons

> 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.

Forward LookingResearch methodologies

> Van Westendorp

> Conjoint analysis

Van WestendorpPrice Meter

1976

Introduction Respondents

Identify

Price points

Optimal

Price range

Respondents are

capable of

envisioning critical

price points

4 open questionsto assess when the product is

iPhone 4

Cheap?

€ …….

iPhone 4

So cheap you would

doubt its quality?

€ …….

iPhone 4

Expensive?

€ …….

iPhone 4So expensive you

would never buy it?

€ …….

Analysis of data

0%

20%

40%

60%

80%

100%

€0.00 €100.00 €200.00 €300.00 €400.00 €500.00

Too cheap

Not cheap

Not expensive

Too expensive

IPP

OPP

PMC

PME

“A word of caution is in order:

price-consciousness of this

nature should never be equated

with propensity to buy.”

Pros and consVan Westendorp Price Meter

Able to identify optimal price points.

But:

Does not take competitive products

into consideration

Is very cognitive (not intuitive)

When to use.

So far, one of the best method for

new products, which are new to the

market, and for which there is no

competition (yet).

Conjoint analysis as a decision-making tool

Discrete Choice Modeling

> Widely used consumer choice model

> Uses ‘utilities’ to indicate consumer sensitivities towards product

characteristics such as price, pack size, features, brand, etc.

> Utilities are estimated at an individual level through Hierarchical

Bayes estimation

> Utilities are used to estimate ‘share of preference’ or

‘share of choice’ for products given a certain competitive set.

Which product would you buy?

€ 699€ 499€ 469

iPhone 6Samsung Galaxy S4Nokia Lumia 1520

A B C

Which product would you buy?

€ 649€ 699€ 399

iPhone 6Samsung Galaxy S4Nokia Lumia 1520

A B C

Price Elasticity measured via CBC

>

Conjoint choice

tasks

Calculate utilities

of attributes

Create

simulation model:

Run millions of

scenarios

> >

Choice-based Conjoint

Intuitive method that takes competition into consideration

Changing other product characteristics is also possible

• Portfolio management

• Different executions of price changes (e.g. via pack size changes)

• Feature optimization

When to use?

• For a thorough read on sensitivity towards price, brand, and other

product characteristics in a competitive market.

• You can investigate price interactions, cannibalization effects and

optimize your offering

CBC Which would you choose?

CBC Product composition

Attributes

Levels

Pricing researchSame input > different outcomes

27% or 34%

CBC virtual shelf environment

Different from econometric analysesCBC indicates price changes for which no historic data exist

+20%

-20%

€3.99

+20%

-20%

€4.99

Tips for setting up a pricing study with conjoint

> Ensure you include the whole relevant competitive set

> Ensure you cover at least 70% of the market, to cover the interactions

for main products

> Display brands in the proportions they are available in the market (e.g. if brand

A has 40% of shelf share, 40% of the products shown should be of that brand)

> In each choice task, show a good portion of the market, ensuring consumers

can make the choices they would in reality

> And of course, use visuals and actual pack shots to enhance realism

50

Whopper $3.50 California W. $ 4.50

Omega3 $3.75 Chicken Deli $ 3.50

Cheddar $0.50 American cheese

$ 0.75

Crispy Onions

$1.50Bacon

$1.50

Curly fries $1.25

French fries $1.05

✔ ✔

✔

✔

✔

Total price $ 8.50

How menu-based conjoint works

>

Select

Multiple items

Selections can

be restricted

Multiple items

or bundles on

each menu

Prices of

individual items vary

> >

Testing a LOT of attributes - ACBC

ACBC should be used in complex

markets with a large amount of

products available - so that

customers need to define an

evoked set for themselves.

What have we learned so far

1. Price elasticity acts as a compass to guide your pricing activities

and is a reflection of your brand and portfolio strengths

2. Market-mix modeling is great for modeling activities that were done

several times before but lack when testing new hypotheses

3. Conjoint analysis allows for market simulation and understanding

choice drivers allowing optimization on the product, brand and

portfolio levels and simulating competitive what-if scenarios

Pricing and e-commerce

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John Ashraf

Product Owner, pricing &

Portfolio management