webinar: what is the right price? the tipping point of price and perceived value
DESCRIPTION
Setting the right price is vital, because price is a key marketing lever and it expresses brand value in a competitive context. The question is: how far can the brand increase prices while securing revenue? The answer is: up to the point where the price change is no longer offset by the perceived value of the product or service. The tipping point depends on the brand's and product's price elasticity. The brand can only raise prices without being penalized if elasticity is low. The key is to focus on setting the right price in balance with the brand's value. Gerard and Ellen explore SKIM's recent meta-analysis of over 200 pricing studies, providing valuable insights on how to achieve that balance. For more information about SKIM's webinars, visit www.skimgroup.com/webinars.TRANSCRIPT
Gerard Loosschilder
CMethO
Ellen Lueb
Project Manager
Abigail Joffre
Today’s webinar host
#SKIMwebinar
Share your thoughts online:
What is the right price?
The tipping point of price and perceived value
Brand resilience = Price elasticity
2
The brand’s ability to withstand
price increases without losing revenue
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
How far can we increase our prices?
3
We can increase our prices up to the point …
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
How far can we increase our prices?
… where the change of price is no longer offset by the perceived
value of the product or service
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Price Elasticity is the slope of the price-demand curve
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Price
De
ma
nd
Revenue
Δ Demand ((D2-D1)/D1)
Δ Price ((P2-P1)/P1) PS =
P2 P1
D2
D1
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Two rules of thumb concerning up-price elasticity values:
If -1 < PE < 0, brand resilience is high and the business benefits
If -∞ < PE < -1, brand resilience is low and the business suffers
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Low price elasticity A price change causes
a small change in demand,
indicating high brand resilience
High price elasticity A price change causes
a big change in demand ,
indicating low brand resilience
Price
D
em
an
d
Price >
Revenue <
-∞ < PE < -1
D
em
an
d
Price >
Revenue >
Price
-1 < PE < 0
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Two rules of thumb concerning up-price elasticity values:
If -1 < PE < 0, brand resilience is high and the business benefits
If -∞ < PE < -1, brand resilience is low and the business suffers
7
Low price elasticity A price change causes
a small change in demand,
indicating high brand resilience
High price elasticity A price change causes
a big change in demand ,
indicating low brand resilience
Low Lower Lowest
If PE is -1.00 -0.50 -0.33
And price is: 1.00€ 1.10€ 1.20€ 1.30€
Δ change 10% 20% 30%
Demand is: 10,000 9,000 9,000 9,000
Δ demand units -10% -10% -10%
Revenue is: 10,000€ 9,900€ 10,800€ 11,700€
Δ revenue -1% 8% 17%
Price sensitivity values
Base Price High Higher Highest
If PE is -1.00 -2.00 -5.00
And price is: 1.00€ 1.10€ 1.10€ 1.10€
Δ change 10% 10% 10%
Demand is: 10,000 9,000 8,000 5,000
Δ demand units -10% -20% -50%
Revenue is: 10,000€ 9,900€ 8,800€ 5,500€
Δ revenue -1% -12% -45%
Price sensitivity values
Base Price
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
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Portfolio Architect
• Rooms represent
brands
• Floors represent
price tiers
• Demand can migrate
from room to room
and from floor to
floor taking the stairs
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
SKU-level price elasticity indicates how demand migrates
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Base case
price
P
rice
If price
goes up…
… demand migrates to
several other SKUs
Price
scenario
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Brand-level price elasticity indicates brand resilience
10
Base case
price
P
rice
If price
goes up …
… demand is more likely to migrate to SKUs within
the brand than between brands (PE Brand < PE sku )
Price
scenario
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Line pricing is applied to mimic market reality
11
Base case
price
P
rice
Price
scenario
Prices go up together,
in a bandwidth
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Unilever is more elastic than P&G and J&J so Unilever’s brand resilience is lower
Elasticity
to up-pricing
Brand
level PE
SKU
level PE
Unilever -1.1 -1.1
P&G -0.9 -1.0
Johnson & Johnson -0.6 -1.0
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For a fair comparison, based on category “Personal care & hygiene” (Category includes: bar soap, body wash/lotion, deodorant, face cream, razor foam, shampoo & styling, feminine pads)
Higher
Lower
Lower Lower
Lower
Higher
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
We see the same for individual brands
Unilever Brand
level PE
Price
index
-0.9 87
-1.2 106
-1.5 65
13
P&G Brand
level PE
Price
index
-0.7 47
-0.7 248
-0.9 104
Price index = value share / volume share within “Personal care & hygiene” category
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Tier effects in price elasticity Overall elasticity is higher in the mid tier
Elasticity
to up-pricing SKU level Brand level Price index
High -1.1 -0.9 104
Medium -1.0 -0.8 102
Low/Private -1.2 -1.0 84
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Lower
Higher
Lower
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Mean price elasticity values to up-pricing
Elasticity to
up-pricing
Brand
level PE
SKU
level PE
Price
index
Unilever -1.1 -1.1 88
P&G -0.9 -1.0 109
Johnson & Johnson -0.6 -1.0 87
15
For a fair comparison, based on category “Personal care & hygiene” (Category includes: bar soap, body wash/lotion, deodorant, face cream, razor foam, shampoo & styling, feminine pads)
Higher
Lower
Lower
SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Mean price elasticity values to up-pricing
Elasticity to
up-pricing
Brand
level PE
% A&P
on revenue
Unilever -1.1 10.6%
P&G -0.9 12.0%
Johnson & Johnson -0.6 4.8%
16 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
What to do with these Pricing Insights?
At low price elasticity
• A brand/SKU level up-price
elasticity value of -1 < PE < 0
• The market sees more value in
the brand and its products than
expressed by the price
• The brand can leverage the
value opportunity to move
closer to the tipping point
(short term opportunity)
At high price elasticity
• A brand/SKU level up-price
elasticity value of -∞ < PE < -1
• The market sees less value in
the brand and its products than
expressed by the price
• The brand should, or should
have, invested in the brand
(long term opportunity)
17 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Identifying the balance between price and value can be done using a simulator and optimizer
18 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
Gerard Loosschilder Chief Methodology Officer
@gloosschilder
Ellen Lueb Project Manager
Abigail Joffre [email protected]
+1 201 963 8430
@SKIMgroup
Go to www.skimgroup.com/webinars
for today’s presentation slides and more!
#SKIMwebinar
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