Consum Insight AP Pt1

7/31/2019 Consum Insight AP Pt1

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Pursuing the5th P of Marketing

Price and ProfitabilityWhat your brand needs to know

about the price of profitability

ASIA PACIFIC

Augu

st2006|

Issue

106|

PartA


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Brand survival and proft

Fundamentally, a brands continuity

depends on its ability to sustain itsel

over the longer term. This means

that the prot it attracts by virtue o

building its equity must be utilized in

ensuring its sustenance. Thereore,

almost all marketing activity

centered around the our Ps o

marketing (Price, Place, Promotion,

Packaging) careully balances the

resultant outcome on the th P

Protability.

A brands protability can be

infuenced by a variety o internal

and extraneous actors but it is

invariably linked to its pricing.

Pricing is central to a brandsmarketing strategy: it cannot operate

in isolation o other marketing

activities and it is a primary driver o

brand prot.

Shoppers: making sense o what

they say

It is critical to understand how the

ultimate arbiters o brand / marketing

success, namely consumers

and shoppers, view themselves.

ACNielsen ShopperTrends, a study

conducted across 50 countries,

identies what shoppers seek rom

retailers and understands their

shopping behaviour in conjunction

with retailer brand equity.

By intersecting what consumers

claim they want rom retailers,

with what actually infuences their

shopping behaviour, it is easier to

pinpoint consumers propensity

towards spiralling prices in the midsto an increasingly aggressive and

price-ocused trade environment.

Surprisingly, the dierence

between the actors that shoppers

state are important versus what

ShopperTrends has ound to be

important indicates that low prices,

though claimed by shoppers to be

a key determinant in driving choice,

is relatively less so. Factors such asEasy to nd, Well stocked, Wide

range and variety and Selection o

quality brands and products are just

as likely to be true drivers o shopper

choice. Low prices, on the other

hand, is seen to be a statement that

is said, but not meant.

This conclusively proves that

shoppers see competitive prices as

a necessary or hygiene conditionamongst retailers and that better

prices per se is not necessarily a

strong dierentiator. This is because

What your brand needs to kno


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about the price o protability

There is scarcely anything in the world that some man cannot make a little

worse, and sell a little more cheaply. The person who buys on price alone is

this mans lawful prey

- John Ruskin.

other retail characteristics are also

important, and can help a retailer

support a price premium versus

the hard discounter. Factors such

as range, availability, convenience,

and quality, too, can have a bearing

on a shoppers exercised choice.

Additionally, brand owners can usetheir brands and their marketing

investments to help retailers achieve

dierentiation in these areas.

Nevertheless, pricing is an integral

part o creating value, sustaining

shopper loyalty and ensuring brand

protability. It is or this reason

that pricing strategy assumes the

importance it commands and must

ollow a specic and deliberateprocess beore it takes its nal orm.

This process calls or management

decisions on product, pricing,

distribution, promotion and personal

selling, and in some instances, even

customer service. This denition

implies that pricing is central to

protable brand marketing!


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1.Cost-basedstrategies

Pricing a brand based on achieving

a given margin over and above

costs o manuacturing, marketing

and distribution. Oten associated

with sales- or production-led

organisations; tends to encourage

a mechanistic approach to cost

control and pricing. Examples:

Cost-Plus:Price = ull cost +

mark-up (as a % o ull cost)

Mark-Up:Price = direct cost +

mark-up (as a % o direct cost).

This technique is preerred to

Cost-Plus or products with a

relevant percentage o direct

costs on total costs.

Break-EvenAnalysis:Price =variable costs + ixed

costs/quantity. This ormula

does not depend on any cost

controlling technique (Full Cost

or Direct Cost); it provides a

useul decisional support or

dierent marketing strategies,

taking into account

return on investments.

2.Competition-based

strategiesPricing based on the competitive

strategy and on attack/deence

moves o competitors against

a given brand. Oten associated

with competitive intelligence-led

organizations; characterised by an

against-someone positioning.

PureParity:Price = Price o

a chosen competitor. Typical

strategy o price takers who

set price equal to one o the

price makers and alignconstantly to it. This can also be

a strategy or speciic channels,

e.g.: vending impulse.

DynamicParity:Given a

chosen competitor, the gap

with its price is kept constant

in time, in order not to change

competitive positioning in the

consumer perception. This

is most common amongst

category leaders and the #2brand, and is usually expressed

as an index, i.e.: #2 brand will

aim or 90% o the category

leaders price.

DiscountPricing:Price is

always below the average o

competitors, allowing a precise

positioning o low perceived

price and low perceived

beneits.

PremiumPricing:Price is

always above the average ocompetitors, allowing a precise

positioning o high perceived

price and high perceived

beneits.

3.Value-basedstrategies

Pricing based on value o a brand

as perceived by the consumer.

Value perceived by consumer

may have little to do with the cost

o manuacturing, marketing or

distribution. Oten associated withmarketing-led organisations, tends

to ocus organisations on maximising

the value creation process. Some

common techniques are:

ElasticityAnalysis: The

price decision results rom the

calculation o the sensitivity

o volumes to price changes.

By simulating dierent price

scenarios it is possible to set

the optimal price to the one

maximizing expected revenuesand proits.

Buy-ResponseAnalysis:The

price decision results rom

market research estimating the

consumers intention to buy

at dierent price levels. The

outcome is a quantiication o

perceived value.

ConjointAnalysis:The

consumer quantiies the

economic value o the perceivedutility or each product attribute,

making it possible to determine

the ideal pricing o each product

coniguration.

Sowhatshapedopricingstrategiestypicallytake?Typically,threetypesofpricingstrategiesarefound.Theseare:


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Defninga

pricingstrategyandpricingobjectives

Segmentationpricing,nichepricing,EDLPorHi-Lopricing,andotherapproachesare

ultimatelyvariationsothesethreeundamentalstrategies.

This toolkit o price tactics is themarketers / retailers arsenal orstrategizing in the pricing game.Managing price strategy consists oviewing pricing through a variety operspectives.

By looking at the varied elementso marketing, proit, value, pricing

objectives and how these interactwith the impact on proitability and thecompetitive dynamics o the market,arriving at a deinitive pricing strategycan be a rewarding activity. Thisincludes looking at key elements othe marketing mix. These are:

Thosethatexertadownwardpressureonprices:

Consumerdynamics

Macro-economic pressure

Sensitivity to price and gaps tokey competitors

Whether the product is a luxury,necessity or substitute

Competitormarketing

Pricing, promotions, media,innovation o the competition inthe market

New entrants

Retailerstrategy

Role o category and brand Competition between retailers Private Label strategy Balance o power; trade margin

negotiations

Thosethatexertanupwardpressureonprices:

Yourownbusinessobjectives

Proit, turnover, volume, share

Ownmarketing

Investment in innovation, media,promotions, packaging

Costogoods

Increasing supplier anddistribution costs

Volume-dependent costs


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Combined with the theory that [proit

= volume x (price - cost)] and that

Perceived Value = Beneits (both

emotional and unctional) / Price,

this helps us arrive at three major

postulates o the pricing game.

Pricing is central to proitable

brand management.

The greater the beneits perceived

by the consumer, the greater the

price a brand can sustain.

Reducing investment in perceived

beneits reduces value.

This also implies, thereore, that

pricing strategy cannot be set in

isolation and that the three major

areas o interaction with price,

namely, promotions, volume,

and proit must be careullyunderstood.

Priceanditsinteractionwithpromotions

A brands strategy can be described

by observing the way its sales react

to changes in price and promotion

and the magnitude o their change.

These changes can range rom

minor changes to major alterations

in o-take or the brand. Slotting this

interaction into our quadrants allowsone to arrive at our strategic situations:

1. High price and requent promotions

(Hi-Lo) when the sales change

signiicantly as the brand promotes

and hardly change when thebrand changes price.

2. High price and low or no promotions(Hi-No) when the sales hardlychange as the brand undertakespromotions and even when itchanges price.

3. Harvest price or proit whensales change signiicantly as thebrand changes price and promotes,the strategy will depend on thecost structure o both the brandand the promotion.

4. EDLP when sales changesigniicantly as the brandchanges price, but are relativelyinsigniicant when it promotes.

Priceanditsinteraction

withvolumePriceasadriverovolume

A brie understanding o economictheory helps us better understandthe impact o price on volume.Equilibrium between supply anddemand deines a products naturalprice; when supply is greater thandemand, prices all and whendemand is greater than supply,prices increase to maintain equilibrium.

Econometric modelling appliesthis theory to brand pricingand by removing the eects opromotions, media and seasonality,measures the relationship betweenhistorical changes in price and

changes in underlying volume.

This is commonly reerred to as the

brands price elasticity.

The elasticity will be negative

i.e. as price increases demand

will decrease, and it is also seen

that this relationship is not linear

but depends on the percentage

(%) change. This implies that to

understand the impact o price on

proit one needs to know the

impact on proit per unit and on

volume sales.

PriceanditsinteractionwithproitPricecanbeseenasadriver

oproit

A price increase has traditionallybeen the best alternative or

increasing proitability. The impact o

this on proit is especially magniied

i a brands current margin is low.

However, price increases are

more visible to consumers than

cost reductions and the reaction

o consumers to price increases

are the ultimate determinant o

its impact on proit margins and

proitability.

A clear understanding o consumersensitivity to a brands price and its

proit margin helps assess whether

price increases will generally be

proitable or unproitable.

How price relates toother variables in themarketing mixTheCharteredInstituteoMarketing(UK)deinesmarketingasthemanagementprocessresponsibleoridentiying,anticipatingandsatisyingcustomerrequirementsproitably.


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For instance, or a brand with a 20%proit margin, a 1% price increasewill increase proit per unit to almost21% equivalent to a 5% marginimprovement per unit. In such ascenario, volume sales would needto decline by more than 5% or totalproits (proit per unit x # o units)to decline. Thereore, any volume

decline less than 5% will mean thatthe price increase will translate to atotal proit increase. In other words,break-even would be achieved witha price elasticity o -5 (a 5% volumechange or a 1% price change).

Perorming this same calculation ora range o proit margins allows usto plot the break-even point whereor any given margin, i the brandsprice elasticity is higher, then a priceincrease will reduce proit, and i thebrands elasticity is lower, then aprice increase will increase proit.

A majority o brands have a priceelasticity o less than three, so inmost cases it is a proitable decisionto increase price the brand hasto already command a very highmargin or it to be unproitable.

It ollows thereore that priceincreases within reason increaseproit as well. This caveat oincreasing prices within reason alsoreinorces the importance o thecurrent proit margin. Price increasesdo, however, also decrease volume

depending on the brands priceelasticity. Thereore total proit willultimately depend on a combinationo a brands proit margin and itsprice elasticity.

Conversely,pricedecreaseswithin reasongenerallydriveadeclineinproitability.

The resultant increase in volumemay oset the decline in proitbut in this scenario too, the totalimpact would depend on thebrands current proit margin andits price elasticity.

Converting this into a scheme orpricing strategy juxtaposes the

two essential parameters o pricesensitivity and proit margins to orma quadrant that describes our likelypricing scenarios. They are:

When the brand proit marginis low and the brand is notsensitive to changes in price,consider a price increase todrive proit as price reductionswill reduce proit.

When the brand proit marginis low and it is very sensitive to

changes in price, review price

1.

2.

increase or decrease or proitgrowth.

When the brand proit marginsare high and the brand is notsensitive to price changes, reviewprice increase or decrease orproit growth.

When the brand is very sensitiveto price changes and has a highbrand proit margin, considera decrease in price to drive

proit since a price increase willreduce proit.

3.

4.

InPartBothisConsumerInsightsissueonPricing

In Part B o our Consumer Issuewe will ocus on a number o casestudies that review pricing in thereal world, across dierentgeographies, distribution channels,competitive conditions andproduct portolios.

Copyright 2006 ACNielsen. All rights reserved. Produced by ACNielsen Communications Department.


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Your competitive advantageWhether your issue is regular pricing strategy, promotionoptimisation or consumer segmentation, ACNielsen

Analytic Consulting will help you create competitive

advantage.

ACNielsen insights provide an understanding o how your

products are perorming compared to the competition

under existing distribution, pricing and promotional

environments. We can help you assess how important

each part o the marketing mix was in determining your

products perormance, and fne-tune your marketing

plans to improve perormance.

As an international company with ofces in more than 100

countries, ACNielsen Analytic Consulting approaches

are truly global best practice, or global competitive

advantage.

For more inormation contact your nearest ACNielsen

ofce or visit www.acnielsen.com.

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