Price responsiveness (elasticity) forms the foundation for understanding and improving your trade strategy. The more elastic a product is, the more it responds to price changes – making it critical to build effective pricing strategies and decide how best to allocate your trade spend. Use econometric modelling to determine both base (shelf price) and promotional elasticities, which together help identify the price management strategy that best suits each item 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 prices as a result of promotions, which are used to drive trials and shopper purchases. Hi-Lo Promoters are highly responsive to promotions, but less so to base price change. With strong shopper demand, you can afford to increase the base price and/or intensify 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 that the product is not that responsive to promotions. Price Leaders have a higher response to base price changes but a limited promotional response. Allocate trade spend to keep base price low through everyday low pricing rather than hi-lo promotions.
- Margin Builders have both low base and promotional price responses. Use the opportunity to take a price increase as sales risk is low. Reduce trade support for these products and reallocate resources 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 market share through increased promotional intensity.
Remember, while sales data is integral to measuring the impact of your strategy, isolating the true effects 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 mechanics such as catalogues and displays.
- Competitor price and promotional activity.
At Circana, we can help you develop 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, ‘How to Build an Optimised Pricing and Promotional Plan. Your Price Right?’
