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7/31/2019 Consum Insight AP Pt1
1/8
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
7/31/2019 Consum Insight AP Pt1
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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
7/31/2019 Consum Insight AP Pt1
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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:
7/31/2019 Consum Insight AP Pt1
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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.
7/31/2019 Consum Insight AP Pt1
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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
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plans to improve perormance.
As an international company with ofces in more than 100
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are truly global best practice, or global competitive
advantage.
For more inormation contact your nearest ACNielsen
ofce or visit www.acnielsen.com.