Get on the Path to Pricing Excellence

Is there a better way to tap the potential of pricing? Should you change your approach to managing price?

The good news is that the science of pricing has advanced significantly; the bad news is that even the best managers have difficulty grasping how to identify and take advantage of pricing opportunities. Despite being the most sensitive lever of profit a business can influence, today price is under-managed and under-leveraged even at many best-in-class companies today.

There is a straight-forward, logical and structured approach to providing companies with the tools necessary to capture the untapped value of pricing excellence.

Let's take a close look at a major consumer packaged goods company. Its current framework for driving pricing decisions leads to sub-optimal decisions that are tactically oriented, reactive and based on conventional wisdom. Spend-back activity is too often focused on trade at the expense of equity spending. Finally, elasticity measures do not consider how consumers organize their behavior.

The path to pricing excellence involves a move to a holistic approach that explicitly considers the three C's of pricing:

• Consumer – What is the competitive frame and what is the right level and type of spend-back?
• Competitive Issues – How will relevant competitors behave and on what timetable?
• Cost Issues – What are the dynamics of your P&L that need to be reconciled?

To determine the right price for consumers, begin by understanding which specific products and brands you compete with. Review all aspects of the response to price by incorporating deep, multi-faceted SKU-level analyses to enable specific list price recommendations.

The next step is developing integrated spend-back strategies on critical brands. Take a strategic view of all spending alternatives with the objective of protecting volume and equity. Don't default to excessive trade spending. Through increased advertising and trade spending, there is an opportunity to off-set volume risk from the price increase while maintaining profit contribution.

Continue along the path to pricing excellence by employing an integrated set of tools to get optimum results. Work with an expert consumer strategy firm to develop a behaviorally defined market structure which can provide a clear and precise understanding of the competitive frame in terms of what categories, which specific brands and which specific SKUs will be impacted by the pricing action. Employ a more accurate and complete measurement of price response by developing brand-level elasticity within the competitive context, category elasticity, and competitive assumptions. Use simulations with "due-to" analyses to develop an optimal spend-back plan from a number of alternatives. Then identify the level and type of spend back that will maximize revenue and earnings while protecting volume and equity to the greatest degree possible.

The final step on the path to pricing excellence is developing key inputs to guide the strategy and recommendations. This includes brand roles, brand-level elasticity input, and key assumptions. For example, due to decile rounding the trade may take a greater-than-list price increase. So, in some cases a 5% list price increase may result in a 6.5% retail price increase.

To determine the financial impact of the price increase, deliver fact-based pricing and spend-back strategy and recommendations, including:

• Segment pricing strategy
• Promoted brand group recommendations
• Advertising spend-back recommendations
• List price increase recommendations.

There is a better way to tap the potential of pricing. Simply change to a fact based, strategic approach and start down the path of pricing excellence.