John Ashraf

Product Owner, pricing &

Portfolio management

Pricing webinar
Sharing Best Practices In Pricing Research
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

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

Competition (vs.
Market based Cost, customers Sales
competitor prices)
Customers (willingness
Value based Cost Marketing
to pay)
 Cost – Plus
Pricing approach +%
• Oldest and (still) most popular • Internally focused: has
approach nothing to do with the market
• Simple: determine the cost of • May not optimize market
each product and add a potential, nor profitability
markup
• May lead to distorted prices
• Objective and financially
over time
prudent but...
 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
 Value based
Pricing approach
• Price is driven by customer value
• Frequently applied in CPG
• Based on customer research
• Heavily restricted by competition
 customer

Bottom line,
all three factors
should be taken
into account
when managing
price price

competition costs
 Different stakeholders
and their priorities

We must go up 3 What will the Which features How do I get my

What will be the impact be on net
share points to should the 2015 products on the front
impact on volume? contribution?
prove leadership models have row of the shops?
Evaluating
your price
 Price / value mapping

Understand how customers Explain and predict Immediately view of your

perceive products market share evolution 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 mapping
Start with determining the perceived value of product features

Fast Michelin
Rating (10-pt scale) Weight Brasserie Bistro Luxury
Food 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 mapping
Price is based on average price for 2-course dinner, excluding drinks.

Value Equation Line

80 €
Michelin Star
70 €
60 € Luxury
50 €
Price

40 €
30 €
20 € Bistro
Brasserie
10 € Fast Food
0€
0 1 2 3 4 5 6 7 8 9 10
Perceived Product Value
 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 mapping
Price is based on average price for 2-course dinner, excluding drinks.

share ‘losers’
value Value Equation Line
80 € disadvantage
Michelin Star
70 €
60 € Luxury
50 €
Price

40 €
value
30 € advantage
20 € Bistro
Brasserie
10 € Fast Food share ‘gainers’
0€
0 1 2 3 4 5 6 7 8 9 10
Perceived Product Value
 Price / value mapping
What if something happens that ‘disrupts’ the market?

new value
80 € old value
Michelin Star
70 €
60 € Luxury
50 €
Price

40 €
30 €
20 € Bistro
Brasserie
10 € Fast Food
0€
0 1 2 3 4 5 6 7 8 9 10
Perceived Product 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 mapping
Adjusting your position

80 €
Michelin Star
70 € Option 1:
1 improve product value, increase Decor
60 € Luxury by remodeling (currently ‘6’) and/or Food
Sophistication by changing Chef
50 € 2
(currently ‘5’)?
Price

3
40 €
Option 2:
30 € reduce prices
20 € Bistro
Brasserie Option 3:
10 € Fast Food a combination of option 1 and 2
0€
0 1 2 3 4 5 6 7 8 9 10
Perceived Product Value
Price
elasticity
Price elasticity
Demand

Δ Demand
PS =
Δ Price
D2

D1

Revenue

P2 P1 Price
 Price elasticity
Demand

High price sensitivity

Demand
Low price sensitivity
-∞ < PS < -1 -1 < PS < 0

Price < Price >

Revenue > Revenue >

Price Price
 Example of Price-Demand curve:

140.00

120.00
Volume index

100.00

80.00

60.00

40.00

20.00
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

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
Pricing
Research
methods
2 basic types of pricing
Research methodologies

rear view forward looking

Rear View
Research methodologies

> Marketing mix modeling

> Store level modeling
> Consumer tracking studies
 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
Rear View
Research methodologies

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.
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
 Forward Looking
Research methodologies

> Van Westendorp

> Conjoint analysis
Van Westendorp
Price Meter

1976

Introduction Respondents Optimal Respondents are

Identify Price range capable of
Price points envisioning critical
price points
 4 open questions
to assess when the product is

iPhone 4 iPhone 4 iPhone 4 iPhone 4

Cheap? So cheap you would Expensive? So expensive you
doubt its quality? would never buy it?

€ ……. € ……. € ……. € …….

 Analysis of data

100%

80%
IPP
60%
PME Too cheap
PMC
40% Not cheap

Not expensive
20%

OPP Too expensive

0%
€0.00 €100.00 €200.00 €300.00 €400.00 €500.00
“A word of caution is in order:
price-consciousness of this
nature should never be equated
with propensity to buy.”
Pros and cons
Van Westendorp Price Meter

Able to identify optimal price points. When to use.

But: So far, one of the best method for
Does not take competitive products new products, which are new to the
into consideration market, and for which there is no
Is very cognitive (not intuitive) 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?
A B C

Nokia Lumia 1520 Samsung Galaxy S4 iPhone 6

€ 469 € 499 € 699

Which product would you buy?
A B C

Nokia Lumia 1520 Samsung Galaxy S4 iPhone 6

€ 399 € 699 € 649

 Price Elasticity measured via CBC

> > >

Conjoint choice Calculate utilities Create Run millions of

tasks of attributes simulation model: 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 research
Same input > different outcomes

27% or 34%
CBC virtual shelf environment
Different from econometric analyses
CBC indicates price changes for which
no historic data exist
+20%

€3.99

-20%

+20%

€4.99

-20%
 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
✔ ✔ ✔

Cheddar $0.50 American cheese

$ 0.75 Curly fries $1.25
Whopper $3.50 California W. $ 4.50

✔ ✔
Crispy Onions Bacon
$1.50 $1.50
Omega3 $3.75 Chicken Deli $ 3.50 French fries $1.05

Total price $ 8.50

50
 How menu-based conjoint works

> > >

Select Selections can Multiple items Prices of

Multiple items be restricted or bundles on individual items vary
each menu
 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
 Share your
thoughts online:
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John Ashraf
Product Owner, pricing &
Portfolio management

Go to www.skimgroup.com/webinars
for today’s presentation slides and more!