Webinar: What is the right price? The tipping point of price and perceived value
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Setting the right price is vital, because price is a key marketing lever and it expresses brand value in a competitive context. The question is: how far can the brand increase prices while securing revenue? The answer is: up to the point where the price change is no longer offset by the perceived value of the product or service. The tipping point depends on the brand's and product's price elasticity. The brand can only raise prices without being penalized if elasticity is low. The key is to focus on setting the right price in balance with the brand's value. Gerard and Ellen explore SKIM's recent meta-analysis of over 200 pricing studies, providing valuable insights on how to achieve that balance. For more information about SKIM's webinars, visit www.skimgroup.com/webinars.
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Webinar: What is the right price? The tipping point of price and perceived value
- 1. Share your thoughts online: #SKIMwebinar What is the right price? The tipping point of price and perceived value Gerard Loosschilder CMethO Ellen Lueb Project Manager Abigail Joffre Today’s webinar host
- 2. Brand resilience = Price elasticity The brand’s ability to withstand price increases without losing revenue 2 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 3. How far can we increase our prices? We can increase our prices up to the point … 3 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 4. How far can we increase our prices? … where the change of price is no longer offset by the perceived value of the product or service 4 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 5. Demand Price Elasticity is the slope of the price-demand curve PS = Δ Demand ((D2-D1)/D1) Δ Price ((P2-P1)/P1) D2 D1 Revenue P2 5 P1 Price SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 6. A price change causes a small change in demand, indicating high brand resilience A price change causes a big change in demand , indicating low brand resilience Demand High price elasticity Demand Low price elasticity -1 < PE < 0 Price > Revenue > -∞ < PE < -1 Price > Revenue < Price Price Two rules of thumb concerning up-price elasticity values: If -1 < PE < 0, brand resilience is high and the business benefits If -∞ < PE < -1, brand resilience is low and the business suffers 6 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 7. Low price elasticity High price elasticity A price change causes a small change in demand, indicating high brand resilience A price change causes a big change in demand , indicating low brand resilience Base Price If PE is And price is: Δ change € Demand is: Δ demand Revenue is: Δ revenue 1.00 € 10,000 units € 10,000 € Price sensitivity values Low Lower Lowest -1.00 -0.50 -0.33 Base Price If PE is 1.10 € 10% 1.20 € 20% 1.30 30% And price is: Δ change 9,000 -10% 9,000 -10% 9,000 -10% Demand is: Δ demand 11,700 17% Revenue is: Δ revenue 9,900 € -1% 10,800 € 8% € 1.00 € Price sensitivity values High Higher Highest -1.00 -2.00 -5.00 1.10 € 10% 1.10 10% 10,000 units € 9,000 -10% 8,000 -20% 5,000 -50% 10,000 € 9,900 € -1% 8,800 € -12% 5,500 -45% Two rules of thumb concerning up-price elasticity values: If -1 < PE < 0, brand resilience is high and the business benefits If -∞ < PE < -1, brand resilience is low and the business suffers 7 1.10 € 10% SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 8. Portfolio Architect • • Floors represent price tiers • 8 Rooms represent brands Demand can migrate from room to room and from floor to floor taking the stairs SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 9. Price SKU-level price elasticity indicates how demand migrates … demand migrates to several other SKUs Price scenario If price goes up… Base case price 9 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 10. Price Brand-level price elasticity indicates brand resilience … demand is more likely to migrate to SKUs within the brand than between brands (PE Brand < PE sku ) Price scenario If price goes up … Base case price 10 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 11. Price Line pricing is applied to mimic market reality Prices go up together, in a bandwidth Price scenario Base case price 11 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 12. Unilever is more elastic than P&G and J&J so Unilever’s brand resilience is lower Elasticity to up-pricing Brand level PE SKU level PE Unilever -1.1 Higher -1.1 Higher P&G -0.9 Lower -1.0 Lower Johnson & Johnson -0.6 Lower -1.0 Lower For a fair comparison, based on category “Personal care & hygiene” (Category includes: bar soap, body wash/lotion, deodorant, face cream, razor foam, shampoo & styling, feminine pads) 12 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 13. We see the same for individual brands Brand level PE Price index -0.9 Price index 87 -0.7 47 -1.2 106 -0.7 248 -1.5 Unilever Brand level PE 65 -0.9 104 P&G Price index = value share / volume share within “Personal care & hygiene” category 13 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 14. Tier effects in price elasticity Overall elasticity is higher in the mid tier Elasticity to up-pricing Brand level High -1.1 -0.9 Lower 104 Medium -1.0 -0.8 Lower 102 Low/Private 14 SKU level Price index -1.2 -1.0 Higher 84 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 15. Mean price elasticity values to up-pricing Elasticity to up-pricing Brand level PE SKU level PE Price index Unilever -1.1 Higher -1.1 88 P&G -0.9 Lower -1.0 109 Johnson & Johnson -0.6 Lower -1.0 87 For a fair comparison, based on category “Personal care & hygiene” (Category includes: bar soap, body wash/lotion, deodorant, face cream, razor foam, shampoo & styling, feminine pads) 15 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 16. Mean price elasticity values to up-pricing Elasticity to up-pricing % A&P on revenue Unilever -1.1 10.6% P&G -0.9 12.0% Johnson & Johnson 16 Brand level PE -0.6 4.8% SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 17. What to do with these Pricing Insights? At low price elasticity • A brand/SKU level up-price elasticity value of -1 < PE < 0 • A brand/SKU level up-price elasticity value of -∞ < PE < -1 • The market sees more value in the brand and its products than expressed by the price • The market sees less value in the brand and its products than expressed by the price • 17 At high price elasticity The brand can leverage the value opportunity to move closer to the tipping point (short term opportunity) • The brand should, or should have, invested in the brand (long term opportunity) SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 18. Identifying the balance between price and value can be done using a simulator and optimizer 18 SKIM Webinar “What is the right price? The tipping point of price and perceived value”
- 19. Share your thoughts online: #SKIMwebinar Go to www.skimgroup.com/webinars for today’s presentation slides and more! Gerard Loosschilder Ellen Lueb Abigail Joffre Chief Methodology Officer g.loosschilder@skimgroup.com @gloosschilder Project Manager e.lueb@skimgroup.com a.joffre@skimgroup.com +1 201 963 8430 @SKIMgroup