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Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
Getting the Price Right
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Getting the Price Right

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most pricing decisions are made at the SKU level, yet analysed at the brand level. BLA propitiatory modeling approach to optimising SKU level pricing allows for strategic decision making.

most pricing decisions are made at the SKU level, yet analysed at the brand level. BLA propitiatory modeling approach to optimising SKU level pricing allows for strategic decision making.

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  • 1. Copyright 2013 Bottom Line Analytics All rights reserved. The Price is Right? The Six Steps to More Profitable Pricing Leveraging Analytics to Generate More Profitable Pricing Strategies & Decisions Sep., 2013
  • 2. Copyright 2013 Bottom Line Analytics All rights reserved. Content 2 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 3. Copyright 2013 Bottom Line Analytics All rights reserved. 3 Forward: The Imperative and Challenge of Pricing • Pricing is considered one of the Four-P’s of marketing and a critical part of the marketing mix • In fact, no single part of the marketing mix has as much impact on sales performance and profitability than pricing • Yet, managers tend to spend less time and research on improving pricing decisions and, likewise, are less knowledgeable of the specific impact that individual pricing decisions have on their brand’s performance in advance of a pricing action • Consequently, sub-optimal pricing decisions are common and managers literally leave millions of dollars of profit and revenue on the table due to poor pricing decisions
  • 4. Copyright 2013 Bottom Line Analytics All rights reserved. 4 Objective • In order to adequately plan, evaluate and implement profitable pricing decision, managers must have a precise understanding of the sales and profit impact of given price changes. This will require development of advanced models or analytic tools which measure: • Brand or Own Product Price Elasticity, which is the percent change in brand sales due to a given percent change in brand price over time, and • Cross or Competitive Price Elasticity, which is the percent change in brand sales due to a given percent change in competitors’ pricing over time.
  • 5. Copyright 2013 Bottom Line Analytics All rights reserved. Content 5 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 6. Copyright 2013 Bottom Line Analytics All rights reserved. 6 Destination • This outlines a 6-step is a proven process that will lead companies and brands to a more effective pricing strategy. • We take our clients directly through each of these important steps: 1. Situation Assessment and Objectives: This involves a thorough review of sales and pricing trends by market and channel for the client brand and key competitors in order to identify where pricing issues and problems might exist. This will then involve identifying specifically the revenue and profit objectives that the client wants to get from its pricing. 2. Analytics: This is all about building predictive models and deriving specific price elasticities by brand and SKU for both the client brand and the cross elasticities versus competitors. 3. Generating pricing scenarios: Once price elasticities are determined, these are estimates of the revenue and profit impact of various pricing alternatives. Once we have generated a sufficient number of scenarios to understand a desirable course of action, we formalize a general pricing plan
  • 7. Copyright 2013 Bottom Line Analytics All rights reserved. 7 Destination 4. Evaluating Risk: This involves understanding and predicting how competitors are likely to respond to the client brand’s pricing actions and the impact of that. In addition, this also involves what is needed and the cost of rectifying various in-market imbalances in the client’s brand pricing. 5. Consolidating insights and developing pricing principles and strategies: With sufficient scenarios and full understanding of current conditions, we formalize pricing principles and develop a formal multi-year pricing strategy and action plan. 6. Optimizing pricing to maximize profit yield. We develop a specific SKU-by-SKU pricing plan by optimizing the price changes by SKU to maximize profit yield. We then plan on implementation,
  • 8. Copyright 2013 Bottom Line Analytics All rights reserved. 1- 3 Plan & Assess 4- 5 Prepare 6 Optimize Assess & Set Yield Targets Situation & Objectives Model Price Elasticities Analytics Competitor Response Evaluate Risk When & What to Implement Generate Scenarios & Plan Timing Consolidate Insights Summarize 6 Principles Profit Yield Optimize A Proven 6 Step Process
  • 9. Copyright 2013 Bottom Line Analytics All rights reserved. Content 9 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 10. Copyright 2013 Bottom Line Analytics All rights reserved. Step 2 Analytics: Sales Model Architecture 10 Brand SKU Price Comptv. Price Macro- Economic Season- ality Weekly Retail Sales by Market Determining Price Elasticities starts with a Predictive Econometric Model of Brand Sales Weekly Retail Sales are driven by Brand SKU Price Plus Competitor’s Price Plus Macro-Economic Factor Plus Seasonality
  • 11. Copyright 2013 Bottom Line Analytics All rights reserved. Econometric models are used to derive price elasticities. All models need to be thoroughly vetted for their accuracy and predictive validity. - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Actual Model 11 Models show an excellent predictive fit to actual sales R2 =97.3, Holdout R2 =89.9, MAP = +/- 1.9%
  • 12. Copyright 2013 Bottom Line Analytics All rights reserved. Content 12 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 13. Copyright 2013 Bottom Line Analytics All rights reserved. We derive price and profit elasticity curves with and without competitor price reciprocation 1.08 1.10 1.12 1.14 1.16 1.18 1.20 10.0 12.0 14.0 16.0 18.0 20.0 22.0 -15% -10% -5% 0% 5% 10% 15% UnitSalesMil NetProfitMil. Price Change Profit Mil wo Reciprocation Profit Mil w Reciprocation Unit Sales Mil wo Reciprocation Unit Sales Mil w Reciprication 13 When competitors match Brand price changes, it reduces the impact from that pricing change Brand Price & Profit Elasticity
  • 14. Copyright 2013 Bottom Line Analytics All rights reserved. Content 14 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 15. Copyright 2013 Bottom Line Analytics All rights reserved. Models also used to understand what is driving growth and decline across markets 4.5% 1.3% -11.3% -1.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% Market 1 Market 2 Market 3 Total 2012 Sales % Impact Competitor Pricing Your Brand's Pricing Macro-Economic Impact Base Momentum 15 From the econometric model, we can determine the impact of different drivers and pricing on overall performance. The problem Market 3 is the one area dragging down overall brand growth
  • 16. Copyright 2013 Bottom Line Analytics All rights reserved. Content 16 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 17. Copyright 2013 Bottom Line Analytics All rights reserved. Price Elasticities and Effects must be at the SKU level, where pricing decisions are made 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.5% 1.6% 2.5% 3.2% 5.4% 7.2% 7.3% 9.7% 25.7% 35.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% SKU 1 SKU 2 SKU 3 SKU 4 SKU 5 SKU 6 SKU 7 SKU 8 SKU 9 SKU 10 SKU 11 SKU 12 SKU 13 SKU 14 SKU 15 SKU 16 SKU 17 SKU 18 Retail Unit Sales Impact % Due to Pricing Retail Sales Impact % 17 BLA models pricing elasticity at the SKU level, where pricing decisions are made. Evidence usually shows that a relatively small proportion of a brand’s SKUs drive most of the pricing impact.
  • 18. Copyright 2013 Bottom Line Analytics All rights reserved. We also look at how pricing at the SKU level affects profits -1.5% 0.0% 0.9% 1.3% 1.3% 1.5% 2.3% 2.3% 3.3% 4.4% 4.5% 4.7% 5.6% 7.3% 9.7% 13.8% 15.9% 22.8% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% SKU 1 SKU 2 SKU 3 SKU 4 SKU 5 SKU 6 SKU 7 SKU 8 SKU 9 SKU 10 SKU 11 SKU 12 SKU 13 SKU 14 SKU 15 SKU 16 SKU 17 SKU 18 Net Margin Yield Impact % Due to Pricing Retail Sales Impact % 18 And similarly, a few SKUs tend to drive most of the profit impact due to pricing
  • 19. Copyright 2013 Bottom Line Analytics All rights reserved. Content 19 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 20. Copyright 2013 Bottom Line Analytics All rights reserved. Different markets and channels have different price responses or elasticities under different conditions -0.3% -0.6% -1.4% -0.5% -0.2% -0.3% -1.0% -0.3% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% Market 1 Market 2 Market 3 Total Price Elasticity: Change in Retail Unit Sales Due to a 1% Increase in Retail Price WO Reciprocation Full Reciprocation 20 Our price elasticity model looks at market/SKU level and with and without competitor reciprocation of your price change
  • 21. Copyright 2013 Bottom Line Analytics All rights reserved. Content 21 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 22. Copyright 2013 Bottom Line Analytics All rights reserved. The model also factors in the effects of macro-economic trends 785,000 790,000 795,000 800,000 805,000 810,000 815,000 820,000 825,000 830,000 835,000 840,000 -15% -10% -5% 0% 5% 10% 15% AnnualRetailSales Change in Housing Starts Housing Starts and Unit Sales Unit Sales 22 Our Model is also able to isolate the impact of key macro-economic drivers
  • 23. Copyright 2013 Bottom Line Analytics All rights reserved. Content 23 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 24. Copyright 2013 Bottom Line Analytics All rights reserved. Deriving a pricing strategy involves knowing which SKUs are the most critical players in the brand pricing equation 24  Quadrant Plots visually show which SKUs are the most critical in terms of pricing Bubble size represents net revenue
  • 25. Copyright 2013 Bottom Line Analytics All rights reserved. Content 25 Forward, Objectives & Destination Destination: The 6 Step Process 1. The importance of analytics a) Developing a Predictive Model b) Deriving Price Elasticity Curves with Competitive Effects c) Measuring the Volume Drivers and Variances d) The Importance of Determining the Sales and Profit Impact by SKU e) Price Sensitivity by Market and Channel f) Macro-Economic impacts on the business g) Identifying the Critical SKUs for Pricing Success h) Price Simulation, Profit Optimization and Scenario Planning
  • 26. Copyright 2013 Bottom Line Analytics All rights reserved. Step 6: Optimize: Optimized Pricing 26  A simulation tool which permits us to estimate different scenarios and optimize profitability within specified targets and constraints, is essential
  • 27. Copyright 2013 Bottom Line Analytics All rights reserved. Step 4 Generate Scenarios & Plan Timing: Generate Pricing Scenarios $0.86 $1.04 $1.28 $1.14 $1.42 $1.77 $- $0.50 $1.00 $1.50 $2.00 Yield $Mil Incremental Revenue & Profit Yields from Optimized Price Scenarios Revenue 3% Increase Revenue 4% Increase Revenue 5% Increase Net Profit 3% Increase Net Profit 4% Increase Net Profit 5% Increase 27  The final pricing decision is from running various optimized pricing scenarios and selecting that which achieves profit goals
  • 28. Copyright 2013 Bottom Line Analytics All rights reserved. Step 4 Generate Scenarios & Plan Timing: Price Elasticity Trends by Period 0.30 0.32 0.34 0.36 0.38 0.40 0.42 Total Elasticity (Absolute Value) 28 BLA’s modeling approach can identify points-in-time when price sensitivities are highest and when is the strategically best time to implement pricing increases or decreases
  • 29. Copyright 2013 Bottom Line Analytics All rights reserved. Contact Us 29 Michael Wolfe mjw@bottomlineanalytics.com David Weinberger david@bottomlineanalytics.com 770-649-0472678-314-8446 (m) 770-485-0270 (o) www.bottomlineanalytics.com Masood Akhtar ma@bottomlineanalytics.com +44 7970 789 663

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