Mastering the Art and Science of Pricing Analytics

Almost everything about marketing is sexy and exciting, spanning, as it does, so many interesting areas that are highly visible to the entire organization and public. Marketers manage the brand (or brands), its position, communications, and lead such popular trends as digital strategies, social media, and guerilla marketing. 

And then there’s pricing, decidedly not sexy despite being one of the most critical aspects of marketing. This is where margins are made, cash flow is generated, and businesses grow. It’s the profitability backbone of an organization. It is also the most measurable aspect of a brand, and lends itself to a plethora of analytics opportunities to make these challenges surmountable.

It’s comfort with and success at pricing that set master marketers apart from the amateurs. Getting there is easier said than done, but amateurs shouldn’t be afraid of taking on the challenge. It simply requires developing a proactive and disciplined mindset and an understanding of the three key aspects of pricing, all against a backdrop of sharper analytics:

· How pricing coordinates with a portfolio of offerings.

· How it integrates with promotions.

· How external pressures influence pricing policies and decisions.

Analyzing pricing and assortment in tandem

It’s axiomatic: Your pricing should match what you are offering. Most marketers, however, only correlate sales and pricing, and perhaps will factor in promotions. More often than not, assortment isn’t factored well enough into the equation – literally.

Pricing ladders – or the tiers that communicate a laddering of valuewithin your portfolio – should be set as far apart as possible while being attainable. If they are too close, you lose margin. If they are too far apart, you lose sales to the competitor filling that gap. Procter and Gamble, renowned for its analytics, does a great job of this in the disposable razor category with its Gillette brand. Before the Gillette Mach 3, the razor category was crowded with Bic and Shick. Now Gillette is practically in the category by itself, owning ladders with its Turbo, Fusion, and ProGlide sub-brands.

Movie theaters, hotels, and airlines are renowned for pricing to the occasion: Everyone knows, for example, that they’ll pay a high price when booking an airline ticket within one week of departure. Airlines have tremendous analytics behind this practice. But the level of science that can be brought to it shouldn’t intimidate you and keep your organization from analyzing occasion-based purchases. For packaged good, occasion overlaps with usage. The Mom and Pop liquor store where I bought my beer in college knew they could charge more for a refrigerated case of beer than one stacked out in the open. They knew that most college kids bought their beer on-the-way to an occasion, and if they were planning to consume it shortly after purchase, there was a value in buying it cold.  If they can base their occasion-based pricing on an observation, you can do it at scale through analytics.

Embracing Promotions

Most industries face ever mounting competitive pressures. As such, promotions are a necessary reality, and one best employed on the offensive. Promotion strategies aren’t about reacting to competition, but about understating how your customers respond to various promotional efforts through analytics. This is the only way to preserve your price position. Promotions are strategic tools allowing a manufacturer to hold a “category captain” spot and dictate in-store experiences for their products, or conversely, allowing a retailer to integrate a holistic store/online experience across product categories.

Despite the fact that promotions fall squarely under the umbrella of the overall brand experience, they too often are executed by the sales division with an eye on near-term sales. Rarely is long-term brand building factored into the equation. Thus, when promotion analytics are optimized around short-term sales (a typical practice), there’s huge risk of weakening the brand’s equity. Customers get sensitized to promotions, and any kind of price premium the brand once had is destroyed. Only by analyzing pricing, promotion, and assortment in conjunction and with an eye towards optimizing both near-term sales and brand equity can you employ successful promotions.

Disciplined pricing starts on day one. Confectionary giants Hershey and Mars have this down to a science. When a new product is launched, it is always offered in only one size, typically single serve. If flavor variants are key to the brand experience, there will be three at most. Major grocers and convenience chains along with Target and Walmart will be prioritized as channel partners. Promotions will be focused on trial events such as free hand-outs, or select coupon drops, so the base price remains clearly visible to customers at all times. Once a solid level of base sales materializes, more channels will receive the product, and additional sizes or flavors are launched.

Keeping External Pressures at Bay

Sharper analytics will enable smart marketers to ensure pricing strategies dovetail with business and brand strategies, and avoid the external pressures that pose pricing pitfalls. Among those be aware of:

· Anticipate and plan ahead -- even events and occurrences that may be out of your control. Fat taxes, VATs, and commodities create cost fluctuations that can wreak havoc on pricing. But this is where the best marketers set themselves apart. Through analytics, you can better understand your price elasticities and make pricing moves in advance of the impacts to mitigate the absolute change of a tax or other influential factor. This was critical just over a decade ago when Europe moved to the Euro. The best marketers in Europe right now are watching closely to understand a potential re-conversion to local currency and what that might mean for sales. As events unfold in Greece, keep an eye on prices in Europe. Should Greece and the EU flirt dangerously close to eliminating the Euro, there are sure to be dramatic pricing changes.

· A solid brand and pricing strategy must not ignore channels. Channels must be aligned with the brand experience and pricing must factor in any associated value-added aspects. This is most often evident in apparel. Take Ralph Lauren. You can purchase Ralph Lauren products online, in its directly-owned stores, at outlet locations, or within a Nordstrom’s department store. Each channel creates unique pricing considerations that must be modeled separately and interactively. What are the pricing tiers associated with each channel? Is the in-store experience in a Ralph Lauren store valued more or less than in a Nordstrom’s and by how much? Only through solid channel analytics can one optimize the price points around each channel.

· Avoid pricing wars. A telltale sign of a weak brand or marketing strategy is one that’s pulled into one. The best marketers know that their focus should be on how to best serve the customer. If a competitor is winning on this front, your battle isn’t with the competitor, but with the customer. This is an indicator that your brand promise is not resonating. The reason you are losing share is because the value you are providing the customer is not aligned with the price you are asking. And this is why it’s essential that any pricing analytics include assortment, channel, promotions, and branding considerations. At my my first college internship at the then-Kraft Pizza Company, the head analytics guy once pulled me into his office and plotted pricing and promotion trends of Kraft’s young DiGiorno brand and its only real competitor, Freschetta. He explained how the promotion strategy was linked to the brand strategy, and showed a clear trend chart tracking how every time DiGiorno ran a promotion, Freschetta mirrored it a week later. Kraft used deliberate analytics synchronized with its brand strategy to dictate pricing and avoid pricing war, and to this day, DiGiorno and its current owner, Nestle, are category captains.

When you strip away all the glitz and glamour of a catchy ad campaign, entertaining social media, and a stunning visual identity, only a few strong marketers are really making money over the long term. It’s takes a disciplined pricing strategy tightly linked to an overall brand strategy, accomplished through integrated pricing analytics. Understanding this is what makes master marketers – those who can satisfy the needs of a business that has quarterly financial targets, while successfully building the brand long-term.

Paul Schrimpf is a senior engagement manager with Prophet, a strategic brand and marketing consultancy that helps its clients win by delivering inspired and actionable ideas. Paul can be reached at pschrimpf@prophet.com.