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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
Go to www.skimgroup.com/webinars
for today’s presentation slides and more!
#skimwebinar
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thoughts online:
John Ashraf
Product Owner, pricing &
Portfolio management