Common beliefs about pricing: myth or truth

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Information about Common beliefs about pricing: myth or truth
Business & Mgmt

Published on February 22, 2014

Author: SKIMgroup

Source: slideshare.net

Description

Would you like to know if changing your pack size is a better idea than changing your price? Do you wonder if price is more important for some categories than others?
In this presentation we showcase some commonly made assumptions in pricing strategy, and dispel or confirm these myths, based on the knowledge gleaned through conducting well over 100 different pricing studies.

Common beliefs about pricing Myth or Truth? Price beliefs impacting marketing strategy in FMCG Sarah Cunliffe | Nancy Savoya

selling price operating profit! McKinsey & Company

Price sensitivity describes shopper behavior. Shoppers are sensitive to price changes if they switch from one product to another as prices move – shoppers are price insensitive if they remain loyal to one product despite price changes When we think and talk about products, we rather use the term price elasticity. The elasticity of a product is said to be 1.3 when a change in price of +1% leads in a change in volume sales of -1.3%

Pricing & Portfolio Management Product Development Communication

SKIM expertise in pricing Set the right price: Strategies need to be based on truths not beliefs

SKIM expertise in pricing SKIM has carried out more than 200 pricing studies in the past 5 years 18 7000 500 45

Frequently purchased products are more price elastic It’s better to decrease pack size than to increase price Women are more price sensitive than men Low Tier Products = High Price Elasticity Low Personal Involvement = High Price Elasticity Consumers are more sensitive to price increases on large formats

Pricing belief 1 Frequently purchased products are more price elastic

Example: Raising the price of soft drinks (high frequency purchase item) will result in a greater loss in volume sold than raising the price of batteries (low frequency purchase item)

Example Classifications 1-2 weeks 3-4 weeks 2-3 months >3 months Cigarettes, soft drinks, baby wipes etc. Pads, laundry detergent, peanuts etc. Face cream, deodorant, mayonnaise etc. Epilators, fragrance, pregnancy tests etc.

Behind the Myth Frequently purchased products represent a higher portion of the spending budget. Moreover, shoppers are believed to be more price aware about these products.

TRUE OR FALSE?

TRUE OR FALSE? TRUE!

Frequency of purchase Frequently purchased products are most price elastic > 3 Months -1.04 2-3 Months -1.09 3-4 Weeks -1.11 1-2 Weeks -1.34 -1.6 -1.4 -1.2 -1.0 -0.8 -0.6 Price elasticity (P.E.) -0.4 -0.2 0.0

So what? Frequently purchased products: Increase price in multiple steps (to change reference point) Less frequent purchased products: Increase price in one go

Pricing belief 2 Categories dominated by females are more price elastic than male-oriented categories

Example: If you increase the price of beer, you should expect a smaller decrease in volume sold, than if you increase the price of lipstick

Behind the Myth Women are often in charge of household items and budget. Men shop mostly for products they are personally involved with.

TRUE OR FALSE?

TRUE OR FALSE? TRUE!

Categories dominated by women are more price elastic Average sensitivity to up-pricing -0.61 Men Women -0.99 -0.78 -1.15 Brand level SKU level

So what? Focus more on up-pricing for categories dominated by men. For categories dominated by women, look into category involvement to determine level of up-pricing potential

Pricing belief 3 The lower the personal involvement of a category, the higher the price elasticity

Example: Synchronized swimmers are less price sensitive to waterproof make-up than they are to laundry detergent Less More

Behind the Myth Shoppers who are highly involved with a product give more consideration to other aspects besides price

TRUE OR FALSE?

TRUE OR FALSE? PARTLY TRUE, PARTLY FALSE

Shoppers seem more tolerant of price increases in categories about taking care of themselves (beauty or health) Price elasticity range by category Personal Beauty and Hygiene Consumer Health Personal Beauty and hygiene Consumer Health Food Food Household cleaning Household cleaning -2.5 -2. -1.5 -1. -0.5 0.

So what? Positioning your product as self ‘pampering’ to increase shoppers’ involvement in your product helps driving down price elasticity and enables you to increase price Increase shoppers’ involvement Enables price increases

Pricing belief 4 It is better to decrease pack size than to increase price.

Example: To increase the price per litre of bottled water sold to Wimbledon spectators, it is better to decrease bottle size than to increase prices.

Behind the Myth Price is believed to be more important aspect of a product than size. Shoppers tend to notice changes in price while a decrease in size might go unnoticed.

TRUE OR FALSE?

TRUE OR FALSE? FALSE!

A size change is equally, or even less effective, than a price change. 20% Change pack size Change in demand 15% 10% Change price 5% 0% -10% -5% 10% -10% -15% Change in price per liter (executed by shelf price or pack size)

Why? 1. 2. Unit Volume 3. Switching behavior

So what? In normal situations, price up. Down-sizing may lead to more volume loss than expected due to the smaller size of the pack. However, be careful about crossing (potential) price barriers!

Pricing belief 5 Products belonging to lower Tiers (including basic private labels) are more price elastic than other tiers

Example: Price is a more important element in the selection of basic private label detergents than of premium branded detergents.

TRUE OR FALSE?

TRUE OR FALSE? FALSE!

Medium tier products are most price elastic. Average elasticity to up-pricing Lower Tier High Tier Medium Tier -1.03 -1.17 -1.21 SKU level

Not driven by price Up-pricing encourages switch to premium SKUs Large number of SKUs within Medium tier

Pricing belief 6 Shoppers are more sensitive to price increases on large formats

Example: Increase: 20% In absolute terms: + £ 0,30 Increase: 20% In absolute terms: + £ 0,80

TRUE OR FALSE?

TRUE OR FALSE? TRUE!

Pack size: Small -1. Medium Large -1.1 -1.3 Average elasticity per pack size

Apply price increases Offer competitive price So what? Apply price increases to your small pack sizes rather than the larger sizes. Make sure to offer a competitive price on large formats

Contact us or follow us online! Sarah Cunliffe | Project Manager s.cunliffe@skimgroup.com +44 (0) 208 222 7707 skimgroup.com linkedin.com/ company/skim Nancy Savoya | Senior Project Manager n.savoya@skimgroup.com +41 22 710 0195 twitter.com/ skimgroup facebook.com/ skimgroup youtube.com/ skimvideos

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