Common beliefs about pricing: myth or truth

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

SKIM expertise in pricing

Set the right price: Strategies need

to be based on truths not beliefs

18 7000 500 45

SKIM expertise in pricing

SKIM has carried out more than 200 pricing

studies in the past 5 years

Frequently purchased

products are more

price elastic

Women are more price

sensitive than men

Low Personal

Involvement

=

High Price Elasticity

It’s better to decrease

pack size than to

increase price

Low Tier Products

=

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)

1-2 weeks 3-4 weeks 2-3 months >3 months

Cigarettes, soft

drinks, baby

wipes etc.

Example Classifications

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!

Frequently purchased products are most price elastic

-1.04

-1.09

-1.11

-1.34

-1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0

> 3 Months

2-3 Months

3-4 Weeks

1-2 Weeks

Fre

qu

en

cy o

f p

urc

ha

se

Price elasticity (P.E.)

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

male-oriented 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

-0.61

-0.78

-0.99

-1.15

Men

Women

Average sensitivity to up-pricing

Brand levelSKU 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

up-pricing potential

Pricing belief 3

The lower the personal involvement of a

category, the higher the price elasticity

Less More

Example:

Synchronized

swimmers are less

price sensitive to

waterproof make-up

than they are to

laundry detergent

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

-2.5 -2. -1.5 -1. -0.5 0.

Personal Beauty and Hygiene

Consumer Health

Food

Household cleaning

Personal Beauty and hygiene

Household cleaning

Food

Consumer Health

Price elasticity range by category

Shoppers seem more tolerant of price increases in categories about taking care of

themselves (beauty or health)

Increase shoppers’

involvement

Enables price increases

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

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.

-15%

-10%

-5%

0%

5%

10%

15%

20%

-10% 10%

Change in d

em

and

Change in price per liter (executed by shelf price or pack size)

Change pack size

Change price

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.

-1.03

-1.17

-1.21

Lower Tier

High Tier

Medium Tier

Average elasticity to up-pricing

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!

-1.

-1.1

-1.3

Pack size:

Average elasticity per pack size

Small

Medium

Large

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

s.cunliffe@skimgroup.com

+44 (0) 208 222 7707

Nancy Savoya | Senior Project Manager

n.savoya@skimgroup.com

+41 22 710 0195

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