Pricing.gap

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The Price is Right?
Six Steps to More Profitable Pricing
Leveraging Analytics to Generate More Profitable Pricing Strategies and Decisions
New Developments in Measurement and Analytics

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Copyright 2013 Bottom Line Analytics All rights reserved.
Content
Forward, Objectives & Destination
The 6 Step Process
1. Situation Assessment & Set Yield Objectives
2. Do the Analytics
Own Brand Price Elasticity by SKU
Competitive Price Elasticities
Pass-Through Assessment
3. Assess Competitive Response Risk
4. Generate Scenarios & Plan Timing
5. Summarize 6 Principles
6. Optimize Profit Yield

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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
• Pricing analytics has a huge upside and is a relatively easy sell, if
done correctly.

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Pricing research and analytic approaches
• The following three approaches are the most used methods for addressing
issues of pricing, price sensitivity and pricing strategy for marketers.
Method Description Advantages Limitations
Von Westendorp Method A survey tecnique which seeks to find the For providing price guidance for new products, Based on perceptions and not on actual mar-
intersection between "perceived too expensive" `` ket behavior.
and "too cheap to be of adequate quality". perience or data.
Conjoint/Discrete Choice Based on trade-off surveys; where price is paired Great for new products and linking price to Provides share or preference simulations, but
Models with various product features and attributes. value-added product features and attributes. also is not linked to actual purchase behavior
Econometric Models Based on statistical linkage or retail prices to actual Requires sufficient historical price and end- Best for existing products and does provide the
product sales. user sales data. Greater uncertainty when critical linkage with actual customer sales or
pricing decisions are outside the range of behavior.
historical experience.

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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.

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Destination
• This outlines a 6-step process that has shown to provide
companies the information and tools needed to make more
profitable pricing decisions
• While not eliminating all uncertainty due to pricing decisions, this 6-
step process will greatly enhance the likelihood that pricing
decisions will be optimized due to:
• Having models and simulation tools that precisely estimate the
impact of any given pricing action on sales, revenue and net
profitability
• Provide intelligence on the likelihood and level of competitive
pricing following your brand’s pricing move
• Provide facts and insight into the best timing for pricing
• Provide the specifics of which SKUs are most critical in the
pricing decision
• Identify which markets or channels where your brand’s price is
not in competitive alignment and what can be done about it
• Uncover the key principles for effective pricing strategy

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Content
The 6 Step Process
2. Do the Analytics

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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

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Content
The 6 Step Process
2. Do the Analytics

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Step 1 Situation Assessment & Objectives: Review
Sales Trends
80
85
90
95
100
105
110
115
120
125
130
Market 1 Market 2 Market 3
Standardized Index of Sales Trends
 Reviewing your current business situation and performance is the
first step for developing pricing goals and objectives. You clearly
need to find the weak links in your business to uncover possible
pricing issues.

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Step 1 Situation Assessment & Objectives:
Summarize Key Driver Trends
• Doing a thorough review of yours and competitor sales and pricing trends will
enable you to focus where pricing needs to be leveraged to rectify potential
competitive imbalances. This is the “smoking gun” which shows a pricing
issue in Market 3.
Competitve
Price Trend
Own
Price
Tremd
Sales
Trend
Your
Price
Competitor
Price
Market 1 -5.1% 2.1% 1.3% 45.50$ 43.50$
Market 2 2.1% 4.6% 4.5% 49.50$ 49.00$
Market 3 -14.3% 5.8% -11.3% 52.20$ 48.60$

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Step 1 Situation Assessment & Objectives: Identify
Competitive Price Misalignments
Market 3 Sales & Competitive Pricing Trends
Your Brand Retail Sales Trends Market 3 Compet.Price Trends Market 3
Uncovering the problem areas in your business will often reveal issues
with competitive price alignment for your brand. This is an area
where pricing remedies will be front and center

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Step 1 Six Situation Assessment & Objectives:
Determining Historical Price Pass-Through
• In markets or channels where your brand’s price is not in alignment with competitive
brands, it is not uncommon to find less than 100%of prior pricing actions being totally
passed through to the end customer. This is certainly the case with Market 3
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Your
Price
Pass Through
Now
Pass Through in
6 Months
Market 1 4.4% 4.1% 4.5%
Market 2 7.0% 6.1% 8.2%
Market 3 8.1% 3.4% 7.3%

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Step 1 Situation Assessment & Objectives: Set Yield
Objectives
• At the core of every pricing action is a trade-off between
sales growth and improving profitability.
• Every pricing action starts with specific volume sales
objectives and profit yield estimates consistent with
profit goals.
• These goals are actualized through careful planning,
estimating and execution. The analytics we will be
doing is specifically aimed towards an accurate
estimate of the sales growth and profit impact or yield
due to the desired pricing action.
• Every pricing decision is the culmination of an effective
balance between competing sales growth and profit
goals.

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Content
The 6 Step Process
Situation Assessment & Set Yield Objectives
Do the Analytics
Assess Competitive Response Risk
Generate Scenarios & Plan Timing
6 Principles & Optimize Profit Yield

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Step 2Analytics: Sales Model Architecture
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

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Step 2Analytics: Sales Model Validation
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Actual
Model
Models show an excellent predictive fit to actual sales
R2 =97.3, Holdout R2 =89.9, MAP = +/- 1.9%

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Step 2Analytics: Derive Own Brand Price & Profit
Elasticities with and without Competitor 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
When competitors match Brand price changes, it reduces the impact
from that pricing change
Brand Price & Profit Elasticity

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Step 2Analytics: Retail Sales Variance Drivers: Annual Unit
Sales Trend Due To:
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
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

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Step 2Analytics: Pricing Impact on retail unit sales
by SKU
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 %
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.

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Step 2Analytics: Pricing Impact of SKU’s on brand
net profit
-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 %
And similarly, a few SKUs tend to drive most of the profit impact due to
pricing

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Step 2Analytics: Price Elasticity with and without Full
Competitor Price Reciprocation by Market
-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
Our price elasticity model looks at market/SKU level and with and
without competitor reciprocation of your price change

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Step 2Analytics: Impact of Housing Starts on Brand
Retail Sales
7,85,000
7,90,000
7,95,000
8,00,000
8,05,000
8,10,000
8,15,000
8,20,000
8,25,000
8,30,000
8,35,000
8,40,000
-15% -10% -5% 0% 5% 10% 15%
AnnualRetailSales
Change in Housing Starts
Housing Starts and Unit Sales
Unit Sales
Our Model is also able to isolate the impact of key macro-economic
drivers

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Step 2Analytics: Pricing Impact Matrix
• Quadrant Plots visually show which SKUs are the most critical in terms of
pricing
Bubble size represents net revenue

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Content
The 6 Step Process
2. Do the Analytics

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Step 3Assess Risk: Competitive Price Response
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
09-01-2010 09-01-2011 09-01-2012
Your Brand Price
Competitive Price
Tracing competitor pricing behavior is critical to understanding the
likelihood of full/partial pricing reciprocation and the timing thereof
Full price reciprocation
occurs, but with a 5-8 week
lag.

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Content
The 6 Step Process
2. Do the Analytics

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Step 4 Generate Scenarios & Plan Timing: Generate
Pricing Scenarios
$0.86
$1.04
$1.28
$1.14
$1.42
$1.77
$-
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$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
 The final pricing decision is from running various optimized pricing
scenarios and selecting that which achieves profit goals

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Step 4 Generate Scenarios & Plan Timing: Price
Elasticity Trends by Period
0.31
0.32
0.33
0.34
0.35
0.36
0.37
0.38
0.39
0.40
0.41
0.42
Total Elasticity (Absolute Value)
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

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Content
The 6 Step Process
2. Do the Analytics

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Step 5 Six Principles: Six Strategic
Principles for effective pricing
1. Setting a Sales & Profit Yield Target: What profit improvement is required? Note that,
with pricing, there is always a trade off with business growth.
2. Evaluating whether your overall price level is inalignment with competitors. Determine
which markets and channels where price misalignment might exist
3. Assessing the likelihood of retail price pass-through. Are retailers passing-through your
price changes to customers?
4. Assessing the likelihood of competitive reciprocation and their timing. Are competitors
matching price changes and is there a lag?
5. Estimating scenarios and optimizing the decision, by SKU. Estimating sales and profit
of different pricing scenarios and putting aplan into place., as well as the best time to
implement pricing decisions.
6. Selecting a pricing level and rate from alternatives and optimizing profit yield
Your
Price
Pass Through
Now
Pass Through in
6 Months
Market 1 4.4% 4.1% 4.5%
Market 2 7.0% 6.1% 8.2%
Market 3 8.1% 3.4% 7.3%

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Content
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The 6 Step Process
2. Do the Analytics

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Step 6: Optimize: Optimized Pricing
 A simulation tool which permits us to estimate different scenarios and
optimize profitability within specified targets and constraints, is essential

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Key Summary and Recommendations
Recommendations
• Plan pricing actions in advance.
• Set specific sales growth and profit objectives from pricing
• Evaluate current situation and pricing/sales trends. Identify where there might be
competitive pricing imbalances
• Due diligence by developing analytics for price elasticity
• Analyze prior pricing actions for competitive response, timing and the level of
price pass through fromprior pricing actions
• Simulation and optimization tools for evaluating different pricing scenarios
• Analytics to determine the best timing and level of pricing adjustments
• Select & optimize the pricing rate which will generate the desired sales & profit
yield

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No. 141, 2nd Cross,2nd Main,
Domlur,2nd Stage, Bangalore560071
Phone:+91 80 40917572, +91 80 40916116
info@therainman.com
Contact Us US Office:
Suite 100, 1780 Chadds Lake Dr, NE
Marietta, Georgia, 30068-1608
Atlanta, USA
info@bottomlineanalytics.com

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