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Quantitative Consulting for Business Price sensitivity and how to measure it

Dr. B o r i s Va i l l a n t

Pricing: The basics Knowing how your customers will react to price changes is the heart of what we call ,,Pricing".

Demand curve

1

Methods for estimating the demand function

Measuring effects of past price changes Market simulations based on market research / Conjoint analysis data Expert workshops

1 Sales

2

The ,,Price elasticity" e measures your customers' propensity to react to price changes

Price 3 Profit-optimal price

Demand Profit

A price increase by x % leads to a decrease in sales by e*x %

The target function need not always be profit, but most often it is Finding the profit-optimal price

4

Demand / Profit

At the optimum, the following simple rule holds for the elasticity e: 1/e = Operating margin Intuition is that low competitive pressure allows for high margins and vice versa

4

Price

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Pricing: Estimating your price position using internal benchmarking A lot can be learned about optimal pricing by comparing the prices or margins realized by your sales force for a given product.

Deviation analysis

Benchmarking B2B-sales performance

# Transactions

1

Comparison of realized margins for individual transactions for a given product

1

Establish reference profitability

2 Profit Real prices and reference line

Transactions

Modified approach using a reference profit line or reference price line

ensure comparability across several products by taking into account the main product and market parameters avoid use of profitability when necessary (not universally known, or under debate etc.). Then the benchmarking can be based on realized price levels. See our article about constructing benchmarking systems

Realized prices

2

Product parameter

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Pricing: Estimating price elasticity in expert workshops An approach to estimating price elasticity for a product is to have internal experts estimate different scenarios for price change.

Price Scenario

Workshop result

Profit-optimal price Demand / Profit

Basis

Market Share (%)

Estimated effect on sales

Demand Profit

Market Share (%)

Price

Market Share (% )

Market Share (%)

Car X Car Y

Market Share (%)

Car Z

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Pricing: Estimating price elasticity using conjoint analysis Conjoint analysis is a popular market research tool to measure customers valuation of product components for new products relative to price.

Brand

Value

Audi

Product "Car"

Ford

Peugeot

Car X

Power Value

80 PS 90 PS 100 PS 110 PS Audi 80 PS 8L Total

Brand Power Consumption Value

Value

Consumption

Value drivers

7L

8L

9L

1

Decomposition of the product into its main value creating components

2

Measure the contribution of each component to the perceived customer value

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3

.Determine a products total perceived customer value

5

Pricing: Estimating price elasticity using conjoint analysis We provide a flexible tool integrating many of the established methods to create and perform conjoint analysis projects online and offline.

Brand Value

Audi

8

Ford

Peugeot

Power Value

80 PS

90 PS

100 PS

110 PS

Brand Value

Audi

Ford

Peugeot

Power Value

80 PS

90 PS

100 PS

110 PS

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Pricing: Estimating price elasticity using conjoint analysis The results of the conjoint analysis can then be used in market simulations to determine price elasticities and optimal prices of products.

Car X

Car Y

Result of market simulation

Profit-optimal price Demand / Profit

Demand Profit

Value

Audi

80 PS

8L

Total

Value

Ford

100 PS

7L

Total

Value drivers

Value drivers

Brand Value

6 8

Peugeot

7 8 8

Price

8

Audi

Ford

Power Value

Market Share (% ) Car X

80 PS

90 PS

100 PS

110 PS

Car X

?

Car Y Car Z

Car Y

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Pricing: Comparison of methodologies For efficiency reasons we favor methods based on internal knowledge and data analysis whenever possible.

Market research / conjoint analysis External expert workshops Measurement of effects of past price changes

All products in the market High complexity / cost Customer view Low precision Only single products New products / Innovations

Internal expert workshops Internal benchmarking systems and reference price lines

Internal view

Relatively precise

Existing products or recombinations

Medium complexity /cost

Product portfolios

Mainly own products

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