Pricing webinar Sharing Best Practices In Pricing Research

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1 John Ashraf Product Owner, pricing & Portfolio management Pricing webinar Sharing Best Practices In Pricing Research

2 About SKIM > Global pricing partner to many multinational companies > Over 35 years of rigorous experience in pricing research > Innovative frontrunners in pricing research and methodologies > Thorough understanding of the pricing challenges you face > We deliver actionable results during interactive pricing workshops

3 200 pricing studies in the past 5 years

4 Pricing

5 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 based Competition (vs. competitor prices) Cost, customers Sales Value based Customers (willingness to pay) Cost Marketing

6 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

7 Market based Pricing 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

8 Value based Pricing approach Price is driven by customer value Frequently applied in CPG Based on customer research Heavily restricted by competition

9 Bottom line, all three factors should be taken into account when managing price customer price competition costs

10 Different stakeholders and their priorities What will be the impact on volume? We must go up 3 share points to prove leadership What will the impact be on net contribution? Which features should the 2015 models have How do I get my products on the front row of the shops?

11

12 Evaluating your price

13 Price / value mapping Understand how customers perceive products Explain and predict market share evolution Immediately view of your product competitiveness

14 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

15 Price / value mapping Start with determining the perceived value of product features Rating (10-pt scale) Weight Fast Food Brasserie Bistro Luxury Michelin Star Food Quality 20% Food Sophistication 25% Restaurant Location 5% Décor 20% Service 30% Total score Average price

16 Price Price / value mapping Price is based on average price for 2-course dinner, excluding drinks Luxury Bistro Brasserie Fast Food Michelin Star Perceived Product Value Value Equation Line

17 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

18 Price Price / value mapping Price is based on average price for 2-course dinner, excluding drinks value disadvantage Luxury Bistro Brasserie Fast Food Michelin Star Perceived Product Value share losers value advantage share gainers Value Equation Line

19 Price Price / value mapping What if something happens that disrupts the market? Luxury Bistro Brasserie Fast Food Michelin Star Perceived Product Value new value old value

20 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

21 Price Price / value mapping Adjusting your position Luxury Bistro Brasserie Fast Food Michelin Star Perceived Product Value 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

22 Price elasticity

23 Demand Price elasticity D 2 PS = Δ Demand Δ Price D 1 Revenue P 2 P 1 Price

24 Demand Demand Price elasticity High price sensitivity Low price sensitivity - < PS < -1-1 < PS < 0 Price < Revenue > Price > Revenue > Price Price

25 Volume index Example of Price-Demand curve: Price

26 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

27 Pricing Research methods

28 2 basic types of pricing Research methodologies rear view forward looking

29 Rear View Research methodologies > Marketing mix modeling > Store level modeling > Consumer tracking studies

30 Marketing Mix Modeling 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

31 Rear View Research methodologies Cons Pros > 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. > 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

32 Forward Looking Research methodologies > Van Westendorp > Conjoint analysis

33 Van Westendorp Price Meter 1976 Introduction Respondents Identify Price points Optimal Price range Respondents are capable of envisioning critical price points

34 4 open questions to assess when the product is iphone 4 Cheap? iphone 4 So cheap you would doubt its quality? iphone 4 Expensive? iphone 4 So expensive you would never buy it?....

35 Analysis of data 100% 80% IPP 60% 40% PMC PME Too cheap Not cheap 20% OPP 0% Not expensive Too expensive

36 A word of caution is in order: price-consciousness of this nature should never be equated with propensity to buy.

37 Pros and cons Van 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).

38 Conjoint analysis as a decision-making tool

39 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.

40 Which product would you buy? A B C Nokia Lumia Samsung Galaxy S4 499 iphone 6 699

41 Which product would you buy? A B C Nokia Lumia Samsung Galaxy S4 699 iphone 6 649

42 Price Elasticity measured via CBC > > > Conjoint choice Calculate utilities Create Run millions of tasks of attributes simulation model: scenarios

43 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

44 CBC Which would you choose?

45 CBC Product composition Attributes Levels

46 Pricing research Same input > different outcomes 27% or 34%

47 CBC virtual shelf environment

48 Different from econometric analyses CBC indicates price changes for which no historic data exist +20% % +20% %

49 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 Cheddar $0.50 American cheese $ 0.75 Curly fries $1.25 Omega3 $3.75 Chicken Deli $ 3.50 Crispy Onions $1.50 Bacon $1.50 French fries $1.05 Total price $

51 How menu-based conjoint works > > > Select Selections can Multiple items Prices of Multiple items be restricted or bundles on individual items vary each menu

52 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.

53 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

54 Pricing and e-commerce

55 Share your thoughts online: #skimwebinar John Ashraf Product Owner, pricing & Portfolio management Go to for today s presentation slides and more!

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