When one experiences a sharp fluctuation with commodity prices that go into their finished products, the timing is right to consider a series of pricing actions to protect margins. But rather than simply changing list prices and trade promotion monies across-the-board to capture these cost fluctuations, an opportunity exists to take a more strategic approach to the way these price changes are determined.
Having worked on a wide variety of brands in many different product categories, planning and executing price and trade promotion changes in a highly disciplined manner is critical. Indeed what has been learned from these experiences is adopting a “scalpel approach” (vs. gross across-the-board price increases), has been instrumental in assisting brands and entire product categories maximize volume, sales and profits.
The typical approach being suggested begins with the measurement of price elasticities by product category, brand, and SKU. From there one should drill down deeper by measuring cross-elasticities amongst individual SKUs that comprise a brand. Should a firm have several brands competing in the same product category, one may go a step further by evaluating the cross elasticities amongst these brands. Finally one should look at the cross-elasticities versus the competition, looking at scenarios that take into account their following, or not following one’s pricing actions.
Besides taking a look at price changes on a macro basis, firms have the capability of conducting a similar analysis on an individual account basis. As one attempts to pinpoint optimal retail price targets on a brand and SKU basis, this activity can be especially beneficial to firms who wish to fine-tune their trade promotion spending and allocation.
Once obtaining the required elasticity data, management needs to look at what pricing scenarios makes the most strategic sense. Various proprietary pricing models exists that should allow one to determine how best to maximize revenue or profit, or the trade-offs one can make amongst these financial metrics.
The final step then is to assemble the materials needed to justify one’s pricing actions to the retail trade. Indeed gaining the cooperation of one’s trading partners is critical to make any pricing action work. Indeed ending up with the wrong price-point, or possibly losing distribution, can be a very bad outcome of a poorly executed pricing action.
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