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Six Keys for Successful Price Planning

in a Shaken Economy
by Mark Laceky
Proven approaches and best practice information for Brand Vice President, Price & Promotion Practice,
Managers, Market Researchers and key pricing stakeholders North America, The Nielsen Company

Overview
The economic downturn continues to put stress on consumers, resulting in accelerating
changes in basic purchasing patterns. An important part of the overall equation for consumers
is the relationship between price and value. As consumers develop new value systems, how
should manufacturers and retailers view and manage the other side of the equation—price?
If your business models and pricing strategies pre-date recent changes in the economy and
consumer behavior, you could be headed for trouble. Perhaps now more than ever, pricing can
serve as marketing’s most powerful lever to drive performance. We all realize we’re dealing
with unprecedented circumstances, and need to act, but what are the guiding principles for
successful price planning? These Six Keys for Successful Price Planning provide a roadmap for
marketers to navigate through our new pricing environment.

The New Pricing Fluctuating Prices


Environment and Costs Pricing is often
The environment in which your Inflation followed by recession. A
pricing strategy operates has changed commodity bubble drove shelf prices one of the most
significantly due to the economic up, and when the bubble burst, shelf powerful and under-
downturn. Fluctuating prices and costs, prices were left in limbo. Manufacturers
changes in consumer behavior, and are trying to hold on to price increases, managed levers
increased or decreased price sensitivity
may impact the effectiveness of your
retailers are pressuring for price rollbacks
and private label is now frequently a
companies have to
pricing strategy. Let’s take a closer look price leader. For manufacturers who have drive performance.
at three forces defining the new pricing locked in long-term futures contracts,
environment: this presents a difficult challenge since
prices can’t be lowered to match private
• Fluctuating Prices & Costs
label price cuts. And given the volatility in
• Changes in Consumer Behavior commodity markets, costs might go back
up, reversing the whole process again.
• Price Elasticity
Changes in Consumer Is Price Elasticity for the product in question and its price
relative to competitors. The point where
Behavior Changing? supply and demand must meet seamlessly
is on shelf, where retailer needs must be
In response to the recession, consumers Consumers are changing their definition satisfied to achieve success.
are changing their definition of “value.” of value at a macro-level. They’re
Changes in shopper buying behavior are trading down across categories, moving
2. Put in Place an Ongoing and
a direct result of consumers’ new value from premium brands to less expensive
paradigm, driving the macro changes alternatives and switching outlets for Flexible Process
taking place across the economy. For the lower price formats. However, this does Many manufacturers used to review
consumer goods industry, this has meant not necessarily mean price elasticity has pricing annually—some allowing years
dramatic swings in category trends that changed. In fact, Nielsen research across to go by without increasing prices. This
have swamped the inflationary price 50 major categories shows that price approach is no longer viable in today’s
increase taken a year ago. elasticity (on average) is only slightly rapidly evolving environment. Driven by a
higher since the recession began. Items in constantly updated cost-of-goods forecast
Tighter budgets are driving a fundamental and monitoring of the competitive pricing
some categories have become more price-
resetting of household priorities—feeding landscape, price planning must now
sensitive and some less.
the family is first and foremost while include constant reviews and revisions.
luxuries are expendable. And everything in You can ensure your pricing strategy Commodity cost volatility means speed
between is being re-evaluated. Purchases considers the changes we’re experiencing and flexibility are more important than
across all categories are being reexamined with fluctuating prices and costs, changes ever. Volatility is expected to continue
with an eye toward necessity and basic in consumer behavior, and price elasticiy through 2009 and into 2010, and changing
value. For some, it means eating out by following the six keys to successful consumer shopping behavior adds to the
less often and cooking at home, eating price planning. complexity. With supply considerations
more chicken, burgers and pasta and less and demand considerations in an ongoing
steak. Some are shifting to lower price state of flux, the optimal pricing plan is
tiers within categories, including private Six Keys for Successful often a moving target—and more reason
label brands. Consumers’ new definition
of value is fundamentally resetting the Price Planning to have in place a flexible and ongoing
planning process.
relationship between value and price.
1. Plan Pricing from Two Starting
3. Take a Portfolio Approach
Points
Every company has broad strategic
Just as careful planning was necessary goals, and these goals cascade down
for the two links of the transcontinental to the pricing strategy for each brand.
railroad to link up exactly at Promontory, Strategic goals and the pricing strategy
Utah, successful price planning begins at for each brand must align to achieve
Reviewing two distant starting points and meets in overall corporate goals. Each brand has
the middle at the shelf—and satisfies all
pricing annually or constituents along the way.
its own pricing considerations—different
strategic roles, margin requirements, price
sporadically is no longer Point one is supply, and point two is elasticities, competitive situations and
demand. Considerations along the supply promotion environments. Trade-offs will
viable in today’s side begin with cost of raw materials and be necessary across brands, depending on
rapidly evolving packaging and proceed to labor costs, the considerations specific to the brand.
transportation costs, profit requirements Each brand’s unique factors and its role in
environment. and plant capacity needs. Starting the corporate portfolio play an important
from the demand side, marketers must role in determining the optimal pricing
understand consumer price elasticity, both strategy.
Gross Profit Grid—5% Price Increase • What is the brand’s role in the corporate
portfolio?
+2% or Better Between -2% and +2% -2% or Worse • What pricing power does each brand
have? Is the brand a leader or follower?
Gross Margin Before Trade Spending
-0.50 • What are minimum turn rate
SKU 1
requirements?
SKU 8
-1.00 • How do regular price and promoted price
Active Price Elasticity

SKU 3
intersect?
SKU 4 SKU 12
-1.50 • What are key price thresholds and gaps
versus competitors?
SKU 9
SKU 7 -2.00 Nielsen Portfolio Pricing Profit Grid. By mapping all of
SKU 5 SKU 11 your products on this grid (by elasticity and gross mar-
gin), you can identify pricing opportunities across your
SKU 6 portfolio. Price elasticity and gross margin, factored
-2.50
together, predict the impact on gross profit of price
SKU 2 SKU 10 changes across all items. Products in the blue (top) band
SKU 13
should consider a price increase. Products in the green
-3.00 (lower) band should not raise price (and could consider
25% 50% 75% a price rollback). Products in the grey band will see only
minor changes to gross profit with a price change.

4. Hard Metrics Must Drive the 5. Establish Key Performance 6. Endorse and Enforce
Planning Process Indicators and Milestones In order to be effective, the portfolio
A successful pricing strategy cannot Any ongoing and flexible plan must pricing process must be endorsed by
be based on intuition or anecdotal incorporate KPIs and milestones for all the highest levels of management and
information. Hard metrics are necessary key brands/sizes to evaluate performance enforced across the organization. This
for a portfolio planning process, and must on a regular basis and make adjustments may be the single most important of
drive the process from beginning to end. accordingly. Scorecards should be created the six keys—without it, each part of
And metrics must be consistent across uniformly and communicated to all the company will likely fall back on their
all brands/sizes. Key metrics to observe internal stakeholders. As actual execution old disparate planning processes. By
include: and performance varies from initial KPI definition, a portfolio approach will mean
goals, plans and goals must be modified. that some brands must align their plans
• Current shelf prices (regular and to portfolio needs. Old habits die hard, so
Managers must maintain an up-to-date
promoted) of all key internal and strong leadership and communication is
understanding of execution versus plan,
external items (must be understood in mandatory.
and act accordingly to improve execution
each planning geography; including any
or modify the pricing plan.
recent price changes)
• Current and expected cost of goods for
each brand/size
• Current list price A successful pricing
• Current gross margin before trade
spending
strategy cannot be
• Most recent contribution to overall
based on intuition
corporate sales and profits or anecdotal
• Most recent annual trade spending by information.
channel and region or key customer
• Competitive prices in each channel and
region or key customer
Putting the Six Keys in-depth knowledge of data, analytics, and
the consumer goods industry. Partner with
About The Nielsen Pricing and Sales
Modeling Expertise Area
into Action a firm that can offer extensive experience
The Nielsen Company’s pricing and
and expertise in pricing analyses across
Effectively executing the six keys for sales modeling solutions can help you
different industries and geographic
successful pricing strategy requires three improve overall ROI through price
locations. This experience will enable
fundamental competencies: the right data, optimization and promotion strategies.
you to solve pricing issues across a broad
the right analytics and the right expertise. We bring deep experience in pricing
spectrum, and help determine the best
strategy, with decades of experience
The right data: Analysis of trended sales pricing strategies to make tactical, precise
and broad and diverse set of tools and
and pricing data should be conducted decisions and achieve profitable growth.
proven modeling techniques. Nielsen
to monitor both regular and promoted tracks purchasing behaviors in 250,000
pricing at the national, market and
retailer levels. Price positioning must be Conclusion households in 27 countries, and measures
40 billion retail product transactions
understood by category and segment. each year. We’ve conducted more than
In a time when consumers are
Purchase behaviors should be understood 20,000 pricing analyses globally across
fundamentally resetting their priorities,
for all key segments of your consumer 30 different industries.
values and behaviors and when
audience. KPIs must be set—typically
commodity prices have fluctuated Above all else, our ongoing commitment
including volume, share, distribution,
wildly, it is more important than ever is to align our business with our clients’
regular price, promoted price, baseline
to constantly review pricing plans and needs to ensure they have a competitive
trends, etc.
the results of pricing actions. Each edge in an expanding global economy.
The right analytics: Combining the right manufacturer and brand faces a unique
modeling techniques with accurate and set of situational factors that are in an
robust data inputs enables the marketer ongoing state of flux due to economic
About The Nielsen Company
to simulate scenarios and better predict uncertainties. Because of all of this, The Nielsen Company is a global
consumer responses. For existing brands/ strategic price planning across the information and media company with
sizes, modeling at the store-week level portfolio is a complex undertaking. Pricing leading market positions in marketing
is ideal and should include competitive is perhaps the single most powerful tool and consumer information, television
cross-effects. Models also should available to marketers, so the payoff and other media measurement, online
include regular price, promoted price is well worth the effort. To optimize intelligence, mobile measurement,
and promotion types and should be run your price planning process and create trade shows and business publications
for each retail channel and planning a competitive advantage, be sure your (Billboard, The Hollywood Reporter, and
geography. From a portfolio planning pricing strategy follows the six keys to Adweek). The privately held company is
perspective, model approaches and success: active in more than 100 countries, with
timing should align across as much of headquarters in New York, USA. For more
the organization as is practical. For new 1 Plan Pricing from Two Starting Points information, please visit www.nielsen.com.
products or scenarios outside historical
parameters, consumer interview-based 2 Put in Place an Ongoing
and Flexible Process
Contact us
conjoint analysis is typically run to For more information on these insights or
understand the impact of price. Other 3 Take a Portfolio Approach other pricing and sales modeling research:
custom approaches can be designed as
needed. Mark Laceky
Hard Metrics Must Drive
4 the Planning Process VP, Price & Promotion Practice
The right expertise: Identifying and North America
integrating optimal strategies for regular The Nielsen Company
5 Establish KPIs
and promotional pricing also requires mark.laceky@nielsen.com
6 Endorse and Enforce

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