Price responsiveness (elasticity) forms the foundation of understanding and improving your trade strategy. The more elastic a product is, the more it responds to price changes – critical to building your pricing strategies and deciding how best to allocate your trade spend.
Use econometric modelling to ascertain both base (shelf price) and promotional elasticities that together help identify the price management strategy that best suits each of the items in your portfolio. This is an essential first step in optimising your trade plan and there are four key strategies to leverage:
- Hi-lo promoters is where a product price alternates between high and low as the result of promotions, which are used to drive trial/shopper purchasing. Hi-lo promoters are highly responsive to promotions, but not to base price changes. With strong shopper demand, you can afford to take a price increase and/or increase promotional intensity using a hi-lo strategy.
- Price leaders is a strategy where you lead with a lower shelf/base price instead of promotions, given the product is not that responsive to promotions. Price leaders have a higher response to base price changes but a limited promotional response. Use trade spend to keep base price down via everyday low prices rather than hi-lo promotions.
- Margin builders have both low base and promotional price responses. Use the opportunity to take a price increase as the sales risk is low. Pull back on trade support and redeploy support to more elastic items.
- Price disrupters are responsive to both base price changes and promotions. Strike a balance between maintaining an attractive base price while driving share through increased promotional intensity.
Remember, while sales data is integral to measuring the impact of your strategy, isolating the true impact of your price and promotional activity is challenging, given a product’s performance can be influenced by many drivers (many of which are outside your control). These include:
- Macro-economic drivers, such as inflation, unemployment, wage growth and raw material costs.
- Environmental drivers, such as seasonality, weather events or holidays.
- In-store drivers, such as planograms, ranging and distribution changes.
- Support mechanisms such as catalogues and displays.
- Competitor price and promotional activity.
At Circana, we can help you create a high-level price strategy with a clear classification of the different pricing strategies most suitable for individual products in your portfolio. Learn more by downloading our free e-guide ‘Is your price right?’.
