Common beliefs about pricing
Myth or Truth?
Price beliefs impacting
marketing strategy in FMCG
Sarah Cunliffe | Nancy Savoya
selling price
operating profit!
McKinsey & Company
Price sensitivity describes shopper behavior. Shoppers are
sensitive to price changes if they switch from one product to
another as prices move – shoppers are price insensitive if
they remain loyal to one product despite price changes
When we think and talk about products, we rather use the
term price elasticity. The elasticity of a product is said to be 1.3 when a change in price of +1% leads in a change in
volume sales of -1.3%
Pricing & Portfolio
Management
Product
Development
Communication
Over the last 35 years, SKIM has conducted research in over
60 countries, together with trusted fieldwork partners
Rotterdam
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Geneva
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Costa Rica
= current locations
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SKIM expertise in pricing
Set the right price: Strategies need
to be based on truths not beliefs
SKIM expertise in pricing
SKIM has carried out more than 200 pricing
studies in the past 5 years
18
7000
500
45
Frequently purchased
products are more
price elastic
It’s better to decrease
pack size than to
increase price
Women are more price
sensitive than men
Low Tier Products
=
High Price Elasticity
Low Personal
Involvement
=
High Price Elasticity
Consumers are
more sensitive to price
increases on large
formats
Pricing belief 1
Frequently purchased products
are more price elastic
Example:
Raising the price of soft drinks (high frequency
purchase item) will result in a greater loss in
volume sold than raising the price of batteries
(low frequency purchase item)
Example Classifications
1-2 weeks
3-4 weeks
2-3 months
>3 months
Cigarettes, soft
drinks, baby
wipes etc.
Pads, laundry
detergent,
peanuts etc.
Face cream,
deodorant,
mayonnaise etc.
Epilators,
fragrance,
pregnancy tests
etc.
Behind the Myth
Frequently purchased products represent a
higher portion of the spending budget. Moreover,
shoppers are believed to be more price aware
about these products.
TRUE OR FALSE?
TRUE OR FALSE?
TRUE!
Frequency of purchase
Frequently purchased products
are most price elastic
> 3 Months
-1.04
2-3 Months
-1.09
3-4 Weeks
-1.11
1-2 Weeks
-1.34
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
Price elasticity (P.E.)
-0.4
-0.2
0.0
So what?
Frequently purchased products: Increase price
in multiple steps (to change reference point)
Less frequent purchased products:
Increase price in one go
Pricing belief 2
Categories dominated by females
are more price elastic than maleoriented categories
Example:
If you increase the price of beer, you should
expect a smaller decrease in volume sold, than
if you increase the price of lipstick
Behind the Myth
Women are often in charge
of household items and budget.
Men shop mostly for products they
are personally involved with.
TRUE OR FALSE?
TRUE OR FALSE?
TRUE!
Categories dominated by women
are more price elastic
Average sensitivity to up-pricing
-0.61
Men
Women
-0.99
-0.78
-1.15
Brand level
SKU level
So what?
Focus more on up-pricing for categories dominated
by men. For categories dominated by women, look
into category involvement to determine level of uppricing potential
Pricing belief 3
The lower the personal involvement of a
category, the higher the price elasticity
Example:
Synchronized
swimmers are less
price sensitive to
waterproof make-up
than they are to
laundry detergent
Less
More
Behind the Myth
Shoppers who are highly involved with a
product give more consideration to other
aspects besides price
TRUE OR FALSE?
TRUE OR FALSE?
PARTLY TRUE, PARTLY FALSE
Shoppers seem more tolerant of price
increases in categories about taking care of
themselves (beauty or health)
Price elasticity range by category
Personal Beauty and Hygiene
Consumer Health
Personal Beauty and hygiene
Consumer Health
Food
Food
Household cleaning
Household cleaning
-2.5
-2.
-1.5
-1.
-0.5
0.
So what?
Positioning your
product as self
‘pampering’ to
increase shoppers’
involvement in your
product helps driving
down price elasticity
and enables you to
increase price
Increase
shoppers’
involvement
Enables price
increases
Pricing belief 4
It is better to decrease pack size
than to increase price.
Example:
To increase the price per litre of bottled water
sold to Wimbledon spectators, it is better to
decrease bottle size than to increase prices.
Behind the Myth
Price is believed to be more important aspect
of a product than size. Shoppers tend to
notice changes in price while a decrease in
size might go unnoticed.
TRUE OR FALSE?
TRUE OR FALSE?
FALSE!
A size change is equally, or even less
effective, than a price change.
20%
Change pack size
Change in demand
15%
10%
Change price
5%
0%
-10%
-5%
10%
-10%
-15%
Change in price per liter (executed by shelf price or pack size)
Why?
1.
2. Unit Volume
3. Switching behavior
So what?
In normal situations, price up. Down-sizing may lead to
more volume loss than expected due to the smaller size of
the pack. However, be careful about crossing (potential)
price barriers!
Pricing belief 5
Products belonging to lower
Tiers (including basic private labels) are more
price elastic than other tiers
Example:
Price is a more important element in the
selection of basic private label detergents than
of premium branded detergents.
TRUE OR FALSE?
TRUE OR FALSE?
FALSE!
Medium tier products are most price elastic.
Average elasticity to up-pricing
Lower Tier
High Tier
Medium Tier
-1.03
-1.17
-1.21
SKU level
Not driven
by price
Up-pricing
encourages
switch to
premium SKUs
Large number
of SKUs within
Medium tier
Pricing belief 6
Shoppers are more sensitive to price increases
on large formats
Example:
Increase: 20%
In absolute terms: + £ 0,30
Increase: 20%
In absolute terms: + £ 0,80
TRUE OR FALSE?
TRUE OR FALSE?
TRUE!
Pack size:
Small
-1.
Medium
Large
-1.1
-1.3
Average elasticity per pack size
Apply price
increases
Offer
competitive price
So what?
Apply price increases to your small pack sizes
rather than the larger sizes. Make sure to offer a
competitive price on large formats
Contact us or follow us online!
Sarah Cunliffe | Project Manager
[email protected]
+44 (0) 208 222 7707
skimgroup.com
linkedin.com/
company/skim
Nancy Savoya | Senior Project Manager
[email protected]
+41 22 710 0195
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