|
Using price modelling to uncover strategic insights requires caution, however, and
it is important to have a clear understanding of which questions can be addressed
with a pricing model.
ACNielsen’s pricing studies are based
on regression modelling of weekly
store level data – this allows the
matching of brand volume changes
to known price changes in-store.
In the first stage, an assessment
of price sensitivities, thresholds
and relationships is undertaken.
The next stage involves providing
recommendations for future price and
promotional strategies and, finally, the
new regular and promotional pricing
scenarios are tested.
Econometric modelling uses the
recent past to predict the near
future. It is suitable for answering the
following questions:
• How sensitive is my brand to
promotional price and changes in
regular price?
• Who are my brand’s key price
competitors?
• Are there any critical price
thresholds?
• What is the impact of changing
the price gap to sister and/or
competitor brands?
• Which pricing strategy should I
apply to the different packs in my
portfolio?
• What is the volume, value and profit
impact of new price scenarios?
It is, however, not suitable for
answering questions such as:
• At which price level should I launch
my new brand?
• How will exceptional price changes
affect my brand’s price sensitivity
and sales? eg:
• Prices reach a new low in a
price war
• Prices increase substantially
• How will dramatic market changes
(ie recession, political conflict) affect
my brand’s price sensitivity and
sales?
• How will significant changes in my
brand’s benefits (ie quality, format)
affect my brand’s price sensitivity
and sales?
In the event that historical data
observations are insufficient to draw
reasonably robust conclusions,
ACNielsen uses other analytical
approaches to align price and
profitability for better brand
performance.
The current preference for price
modifications appears tilted towards afondness for price cuts. The tendency
to cut prices as a way of stimulating
change needs to be evaluated very
closely with the manner of change it
could bring about.
Price cuts have a definite and tangible
adverse impact on profitability. For a
brand with a 20% profit margin and a
similar retailer margin, a price cut of
1% results in a 5% decrease in profit
margin and implies a required rise
of 5% in sales to offset this loss of
profitability.
Clearly, consumers are not
always seeking price reductions
for the sake of reduced prices,
but because they are looking to
discover value. The focus therefore
should be on creating value for
consumers rather than destroying
profitability.
|
