Price Modeling & Management
Key Elements:
Sophisticated modeling techniques
Accurately accounts for geographic or consumer segment differences in price elasticity
Incorporates key price points and competition
Financial analysis considering margins and retail pass-through of price changes
Helps determine optimal pricing across a wide range of items
Marketing Analytics price models have been used to guide decisions on billions of dollars of product, providing insights into expected volume at new prices, key price points, changing price sensitivity, shelf versus promotional price changes, portfolio pricing, and competitive price matching.
The solution we implemented for Kraft Foods is literally a textbook example of a successful automated modeling system.
"Kraft has invested in software to provide automated and standard modeling results and on the information infrastructure to rapidly feed data into this software. This investment has made possible the "mass production" of standard econometric models of price and sales promotion across hundreds of product groupings in dozens of product categories. .. One additional benefit of this process of automated modeling is a cross-sectional database of model results that can be further analyzed to produce company-wide insight into the effect of key measures such as price elasticity, trade merchandising effectiveness, etc. on brand performance." [Hanssens, Dominique M., Leonard J. Parsons, and Randall L. Schultz. Market Response Models: Econometric and Time Series Analysis. 2nd Edition. Boston: Kluwer Academic Publishers, 2001.]
Power of Bayesian Shrinkage Estimation
Able to stabilize estimates so they are reliable by consumer segment, market, or even individual store/store cluster
Any segmentation for which different price strategies can be practically and legally implemented can be handled with this technique
Pricing Profitablity Analysis
Utilize framework from economic theory: product priced optimally when
margin = 1 / elasticity
Not dependent on any model specification – flows mathematically from margin and elasticity
Pricing Opportunity Chart
Given margins and accurate measures of price elasticity from our models, a client’s product portfolio can be profiled