Hi, welcome to expert talks at InsightsNow. In this video, we will speak about how pricing and promotion analytics can be leveraged by companies to achieve profitable business growth.
All of us are aware of the classical price elasticity curve where as the price of a product is reduced, the quantity is sold and the demand tends to increase. And on top of that, if you overlay a profit maximization curve, one could arrive at a sweet spot at which price a company can maximize its profit earnings while optimizing for units sold and unit margin. However, this is a very simplistic approach and has a few challenges.
Number one, it does not account for the level of competition intensity.
Number two, it does not take into consideration the type of customers and the reasons for which they buy that particular product.
Number three, the company could have other product variants which may have a cannibalization impact if the price of the original product is reduced.
So firstly one should look at pricing and promotion analytics in combination. That is because as far as the end consumer is concerned, he or she is only bothered about the final amount of money that they pay to get the product out of the door.
Number two, while price builds perception and promotion drives impulse, the end objective of both of them is to drive profitable business growth for the company. And so one needs to look at both of them jointly.
From a price sensitivity perspective, one needs to create a price sensitivity score for each of the items in the company’s range, and for that, a few input factors are required.
From a company-related inputs perspective, it could be how many products of the company carry this range. How many product variants does it have which have similar product attributes like the item in question, what is the contribution of this item to the overall sales value and sales volume of the company?
From a competition perspective it is necessary to establish inputs related to competition intensity from the number of competition that is there, the number of competitive products with similar product attributes that are available in the market and what is the location, presence, and distribution strength of competition in the geography in which the company operates.
From a customer perspective, inputs could be related to what is the proportion of repeat share of customers who buy the company, are there historical data available about price, the impact on them, are there data related to traffic and conversion rates, etc. So using a combination of all these inputs and using multifactor algorithms, one could arrive at a price sensitivity score and then rank all items from 0 to 100.
Now from a promotion analysis perspective, you could use the same approach and arrive at a promotion affinity score. How are the inputs, in this case, would be slightly different from company-related inputs. It would be history of various promotions that have been done either direct promotions or bundle promotions, etc. What were the type of sales increase and margin increase and cost inputs that went into that particular promotion?
From a customer perspective, inputs could be related to has there been historical increase in transactions, average build quantity, average build value, category penetration, have there been lot of product returns, etc. And all those factors could then be input into a multi-factor algorithm and arrived at a promotion affinity score. And again, items would be ranked or sorted in order of 100 to 0.
So one can now create a two by two metrics of price sensitivity scores and promotion affinity scores and items that fall in the first quadrant of high price sensitivity and low promo affinity, Typically, for those items, company follows everyday low pricing strategy and at the minimum, it matches competition pricing.
For items in Quadrant two with high price sensitivity and high promo affinity, companies follow a low-low strategy, they follow EDLP for most items, and on top of that, they also do a competitor promo match.
So companies like Tesco typically have items of quadrant One and quadrant two into the price basket, which is something that they benchmark on a regular basis with competitions, prices, and promotions, and ensure that they are always at a price value index of 100 or less compared to competition. Quadrant three are items where both the price sensitivity as well as the promo affinity is least.
Now, these are items where companies typically focus on building more product differentiation, more product innovation, looking at how they could build efficiencies into their supply chain and production systems so that while they continue to give value to customers, they can also maximize the margins that they can make from this particular quadrant.
Quadrant four is essentially where the price sensitivity is less but the promo affinity is high. A typical category would be something like furniture, where there is a high-risk price, and then companies provide promotions to create impulse for a customer buying behavior.
So these are a few approaches how companies could look at a combination of price sensitivity and Promo affinity and build their pricing and promotion strategies. It’s been seen that companies who have diligently implemented this approach have seen margin improvements anywhere from 2% to 7% over a period of 12 to 18 months. I hope you found this video useful. Please do follow us @insightsnow.cloud. Thank you.