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Is it expensive or cheap? Knowing the right price.

 

Pricing is important lever for achieving strategic objective. One percent price increase results in 20% profit margin increase on SKUs with 5% profit margin. Companies are aware of that and are putting much thought in how they set prices.

Pricing is important lever for achieving strategic objective. One percent price increase results in 20% profit margin increase on SKUs with 5% profit margin. Companies are aware of that and are putting much thought in how they set prices. Recent research among marketing executives has shown that prices are set either only by management or only by marketing or by sales and marketing together [1].

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Managing prices is complex. Stakeholders have many challenges to address, such as:

  • Pricing strategy: What are the objectives of setting the “right” price? What pricing strategy is correct to achieve objectives set in business strategy? How and why does one address customer segments with “right” price?
  • System for price setting: What price structure / price setting system is appropriate for industry we do business in? What is optimal price and how do we determine it? Which factor to take into account when changing prices?
  • Price realization: How to change prices to improve results? Should prices differ among channels / markets / customer segments and by how much?
  • Price perception: How does customer perceive price? Which criteria / mental calculations does customer use to decide whether to make the purchase?
  • Managing prices: How to change prices and what KPIs to track? How do we react to market   changes / competitive actions?

Pricing strategy connects business strategy and price management. Appropriate sales targets need to be defined that translate into achieving business objectives. Simplest objectives of pricing strategy are: sales growth, growth in quantity sales, margin growth, and keeping market position … When defining pricing strategy we need to take into account product / service life cycle position and limitations which are inherent on the market we operate in. It will be harder to increase sales when we are market leaders and market is shrinking as a whole.

Figure 1: BCG matrix [2]

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But that is theory. Probably you would like to know how does one actually prepare and execute pricing strategy. From many years of accumulated experience, we can tell you that there is no single right recipe. Each company is different.

We advised regional retailer on new pricing strategy. Top management were aware that their existing pricing strategy was not adequate for the changed market dynamics where overall retail sales are shrinking and competitors are investing a lot in lower prices and promotions and consumers are more and more price sensitive. Top management was not aligned in what their business objectives should be in the coming period – they wanted to pursue sometimes contradictive objectives ie. Increase revenues and market share and at the same time have higher margin and higher consumer satisfaction. We can agree that most CEO would support such strategy if it could be formulated and executed in the conditions we are doing business in.

We executed the above project in 6 steps.

Figure 2: Indigo steps taken to define new pricing strategy

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Step 1: Objectives. Firstly, we defined and prioritized business objectives of new pricing strategy. It was decided, that workshop format will be used to discuss current market position, market dynamics, and vision of major owners and different scenarios that could develop and how competition might behave. In the series of multiple workshop a hierarchy of business objectives was defined that must be achieved / supported with new pricing strategy. Also, boundaries were set on how much impact new pricing strategy can have on key business KPIs in the coming period.

Step 2: Measures. Then we defined measures / areas of change in the pricing which we assessed were beneficial to achieve desired targets. We defined model of defining SKU retail prices which included the consumer component and the overall market promotion intensity in the category. This model was used to define desired pricing landscape between and inside categories.

Step 3: Impact. Based on the desired pricing landscape we estimated the impact of new pricing strategy on key KPIs. In estimation, we used current SKU sales KPIs, took into account price elasticity where this data was available. Calculated impact was compared to KPI change boundaries set in Step 1. If impact was outside of acceptable boundaries, certain elements of pricing strategy were adjusted.

Step 4: Implementation plan. Large scale price changes across assortment don’t happen overnight. A strict schedule of price changes has to be prepared and all sorts of contingencies planned. The core of the plan are changes in the pricing system, managing price changes in shops, marketing support activities and supplier activities. When all these micro-plans were in place, a detailed impact of pricing changes on monthly level was estimated and could be then used by controlling to adjust business plans.

Step 5: Corrective measures. When preparing implementation plan, major risks were identified for each area of implementation plan. For example, in the case of marketing activities, major concern was that consumers might identify changes in price strategy only as a price increase strategy. For each of these risks, one or more contingency plans were prepared as well as events / KPI thresholds were defined when contingency plan is triggered.

Step 6: Price management process. Each company has its own process for managing prices. In case there are major changes in pricing logic, approach, intensivity or dynamics of price changes, existing price management process needs to be adjusted. The adjustments should be in the process areas that enable regular monitoring pricing impacts and for management of corrective actions.

Sources: 

[1] DMS MKT TOPX 2015/2016

[2] http://www.thebcgmatrix.com/the-bcg-matrix-and-the-product-life-cycle-plc/

Authors:

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Dr. Miroslav Babić, Consultant

mitja

Dr. Mitja Pirc, Director

info@indigo-pristop.si

 



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