Pricing strategy, pricing design and price promotions are among the most important levers for most brands as part of their overall go-to-market strategy. And therefore, it is of course often discussed and high on the agenda for any marketeer, no matter if you are a global FMCG brand or a local e-commerce business with a niche target group. Price matters to most consumers, and therefore you need a well-informed decision-making setup to ensure solid insights for future decisions.
This blogpost is partly motivated by a recent research study published by the IPA (Les Binet and Dom Boyd, slides), which touches exactly this topic. The study challenges the fact that investments in price promotions among UK advertisers are now apparently twice as large as investments in paid media, which according to the study can be harmful to long-term profitable growth.
In the below, we will cover a few topics in relation to how you can approach the analysis of pricing effects, and what a business should look out for when evaluating the outcomes of price changes or price promotions.
What is the true, incremental impact of a price promotion?
When running a tactical price promotion during a campaign period, the only possibility for you as a business analyst or brand manager is often to look back and try to estimate the real outcome in hindsight. In a perfect world, you would have set up an experiment (A/B test) in order to conclude the incremental contribution, but for many reasons this is not always possible. This leaves you with the possibility to analyze the activity from a “post campaign” perspective and make your conclusions based on that.
When you look back at your most recent campaign, you will typically look at the relationship between price and volume (or revenue). You may also compare it to a previous, historic campaign period, which had the same promotion level on a similar product. This approach, however, raises a few problems, or at least possibilities for misinterpretation.
The key problem is, that a lot of other things have typically affected the sales volumes differently in the two “comparable” promotion periods. Some of the most common factors that can have changed between the two campaign periods are the competitive landscape, your distribution channels, changes to your own product portfolio, the macro environment and your own media investments backing the promotional offer.
Just by thinking about the potential impact of all these things, it becomes clear that a simple conclusion of a “-5% effect” from the most recent pricing activity compared to the previous campaign can easily be a misinterpretation. Other drivers may simply have caused the apparent negative result.
In order to estimate the true, incremental contribution from your pricing activity, you therefore need to set up a data driven model that can estimate the effect from all relevant drivers.
This is exactly the essence of the research from the IPA: Advertisers have a “blind spot” when evaluating the incremental contribution from price promotions, which can lead them to wrong conclusions and ultimately be harmful for profitable growth.
Put in another way: Understanding the interactions between pricing and all other commercial drivers is key to making better decisions and reaching your business targets.
What kind of pricing insights can you look for as part of a modelling setup?
As described above, a strong data driven sales model (also called a predictive model) can help isolate the true effect of pricing on sales and, importantly, show how pricing works together with your other commercial levers.
Depending on what kind of business you are and what product you bring to the market, you will be able to generate a range of actionable insights for your future pricing strategy, such as:
- Is there a lower limit to how much you should reduce your price in a tactical campaign?
- What is the optimal campaign length of a tactical price promotion?
- What is the overall price elasticity, and how does it vary across sales channels?
- How do marketing investments and pricing initiatives interact?
- What is the impact of general price increases across your product portfolio over time?
- How do price promotions affect the brand KPIs, and is this harmful for future growth?
A strong modelling setup can therefore help you move beyond simply measuring whether sales went up or down during a promotion. Instead, it can help you understand the underlying drivers of the result and, importantly, what this means for future pricing decisions.
If you can relate to any of the above topics and questions, don’t hesitate to reach out to us!
Illustration: Freepik.