pricing analytics case study
TRANSCRIPT
Pricing AnalyticsSuccessful Case Study
Case Situation & Results: DIY Brand Pricing Analytics
• A major brand marketing in the home-improvement retail sector found itself struggling to grow demand. BLA was commissioned to evaluate and test their in-market retail pricing to determine what degree this has been a drag on their performance. We constructed models to measure price elasticities across 18 SKUs.
• Our findings revealed that, overall, pricing for their products was price “inelastic”. However, we found that their premium-line of products had very high price elasticities, such that, price increases for these SKUs were not determined to be profitable. We concluded that an actual price roll-back was in order. Such a move would actually be slightly profitable and would grow overall sales by an estimated +7%.
• After nearly flat sales, the following year witnessed a sales turnaround with actual growth exceeding 8 percent!
Sales Model Architecture
3
BrandSKUPrice
Comptv.Price
HomeImprovmt
Spend
Season-ality
Weekly RetailSales by
Customer
The models determine the impact of these key drivers on weekly retail unit sales by retailer over 3 years, 2010-2012
Weekly Retail Salesare driven by
Paslode’s PricePlus
Competitor’s PricePlus
Home Improvement SpendingPlus
Seasonality
Sales Model Validation
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1/9/
2010
3/9/
2010
5/9/
2010
7/9/
2010
9/9/
2010
11/9
/201
0
1/9/
2011
3/9/
2011
5/9/
2011
7/9/
2011
9/9/
2011
11/9
/201
1
1/9/
2012
3/9/
2012
5/9/
2012
7/9/
2012
9/9/
2012
11/9
/201
2
1/9/
2013
3/9/
2013
5/9/
2013
7/9/
2013
Actual
Model
4
Models show an excellent predictive fit to actual salesR2 =95.3, Holdout R2 =93.2, MAP = +/- 2.9%
Retail Sales Variance Drivers: Annual Unit Sales Trend Due To:
+0.9%
+1.9%
-13.6%
+0.1%
-20.0% -15.0% -10.0% -5.0% 0.0% 5.0%
Retailer 1
Retailer 2
Retailer 3
Total
2012 Sales % Impact
Competitor Pricing
Brand's Pricing
Remodeling Spending
Base Momentum
5
More favorable Competitor Pricing trends has lifted Retailer Two’s sales trends positive. Retailer Three’s weak sales is affected by both adverse
pricing and weak prior sales momentum.
Price Elasticity with and without Full Competitor Price Reciprocation
-0.2%
-0.7%
-1.8%
-0.6%
-0.1%-0.3%
-1.1%
-0.3%
-2.0%-1.8%-1.6%-1.4%-1.2%-1.0%-0.8%-0.6%-0.4%-0.2%0.0%
Retailer 1 Retailer 2 Retailer 3 Total
Price Elasticity: Change in Retail Unit Sales Due to a 1% Increase in Retail Price
WO Reciprocation Full Reciprocation
6
Overall, brand is “price inelastic” indicating that retail price increases, except in Retailer Three, will tend to be profitable
Price Elasticity with and without Full Competitor Price Reciprocation
-0.30%
-1.20%
-0.40%
-0.60%
-1.40%
-1.20%
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
Basic Premium Accessories Total
Price Elasticity: Change in Retail Unit Sales Due to a 1% Increase in Retail Price
WO Reciprocation
7
The Basic product continues to be “inelastic”. However, the premium product shows significantly higher price sensitivity.
Pricing Impact by Product Line
0%10%20%30%40%50%60%70%80%90%
100%
Share of Sales Sales Impact Net Profit Impact
Premium LineAccessoriesStandard Line
8
The higher price-point premium line has the highest price sensitivity and therefore accounts for significantly higher share of the pricing impact due
to price changes.
The NLP Initiative amounted to a -10% price rollback for the Premium Line.Estimated Impact of NLP Initiative: Generates +6.8% Gain in Sales
-
5,000
10,000
15,000
20,000
25,000
30,000
3/16/2013 4/16/2013 5/16/2013 6/16/2013 7/16/2013 8/16/2013
Total and Estimated Brand Retail Sales with and without NLP Initiative on Premium product line
Model Est Reg Price
Actual at DiscountedPrice
9
Brand Price Sensitivity Curves Shifting Slightly in 2013
0.94
0.99
1.04
1.09
1.14
1.19
1.24
1.29
1.34
1.39
-15% -10% -5% 0% 5% 10% 15%
Uni
t Sal
es M
illio
ns
Price Change2012 Elasticity 2013 Current Elasticity
10
Overall price sensitivity has shifted “slightly” to more elastic, but the shift is ever-so small.
DIY Brand Price Elasticity
Brand Price Sensitivity Curves
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
1.00
1.02
1.04
1.06
1.08
1.10
1.12
-15% -10% -5% 0% 5% 10% 15%
Net
Pro
fit $
Mil
Uni
t Sal
es M
il.
Price ChangeUnit Sales Mil wo Reciprication Unit Sales Mil w Reciprication
Profit Mil wo Reciprocation
11
When competitors match the brand’s price increase, the overall sales impact is significantly less when competitors match the brand’s price increase
Price Elasticity for Sales & Net Profit
Forecast of Home Improvement Spending
6.2%4.2%
4.5% 4.3%3.0% 3.3%
7.0%7.5%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
Four-Quarter Moving Total in Billions Four-Quarter Moving Rate of Change
12
Total Home Improvement Spending & Forecast
The most recent official LIRA forecast of Home Improvement Spending calls for a significant +14.7% growth in the next year. We see a more modest improvement from +4.8 to +6.4%
gain over the next 12 months
Impact of Home Improvement Spending on Brand Sales
1,040,000
1,045,000
1,050,000
1,055,000
1,060,000
1,065,000
1,070,000
1,075,000
1,080,000
1,085,000
-15% -10% -5% 0% 5% 10% 15%
Annu
al R
etai
l Sa
les
Change in Home Improvement Spending
Home Improvement Spending & Unit Sales
Unit Sales
13
Overall Home Improvement Spending is Expected to Increase 6.4% in the next year should have a +1.2% impact on Brand’s Retail Sales.
Pricing Impact on retail unit sales by SKU
0.2%0.2%0.2%0.2%0.3%0.3%0.3%0.3%0.8%1.0%1.1%
2.3%3.4%
7.6%7.6%
14.7%22.5%
37.1%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
650604 - 2-3/8 X .113 SM BR RD 2M650387 - 3 X .131 RS HDG PLUS RD
650238 - 2-3/8 X .113 RSRD650535 - 3-1/4X131 SMBT 1M FNP 30D
650237 - 2-3/8 X .113 RD650523 - 2-3/8X 113 RSBT 1M FNP
650526 - 2-3/8X113 RSHDG 1M FNP 30650239 - 3-1/4 X .131 RD
650524 - 3 X.120 SM BT FNP 30D650603 - 2-3/8 X .113 RS BR RD 2M
650564 - 2 x.113 RSHDG PLUS RDFNP650527 - 3 X120 RSHDG+ 1M FNP 30D
650236 - 3 X .120 RD650388 - 3-1/4 X .131 HDG RD
650210 - 3 X .131 RD650381 - 2 X .113 RS HDG RD
650383 - 2-3/8 X.113RS HDG RD650385 - 3 X .120 RS HDG RD
Retail Unit Sales Impact % Due to Pricing
Retail Sales Impact %
14
5 of the 18 SKUs listed here account for about 90% of the impact due to a Brand pricing change
Pricing Impact on Brand’s net profit by SKU
-2.4%-2.4%-2.2%
-1.5%-1.3%-0.8%-0.6%
3.6%3.7%
5.2%5.4%
6.0%6.2%
7.6%9.2%
11.4%13.6%
17.0%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
650535 - 3-1/4X131 SMBT 1M FNP 30D650524 - 3 X.120 SM BT FNP 30D
650523 - 2-3/8X 113 RSBT 1M FNP650526 - 2-3/8X113 RSHDG 1M FNP 30
650564 - 2 x.113 RSHDG PLUS RDFNP650238 - 2-3/8 X .113 RSRD
650237 - 2-3/8 X .113 RD650527 - 3 X120 RSHDG+ 1M FNP 30D
650604 - 2-3/8 X .113 SM BR RD 2M650383 - 2-3/8 X.113RS HDG RD
650388 - 3-1/4 X .131 HDG RD650387 - 3 X .131 RS HDG PLUS RD
650210 - 3 X .131 RD650603 - 2-3/8 X .113 RS BR RD 2M
650239 - 3-1/4 X .131 RD650381 - 2 X .113 RS HDG RD
650236 - 3 X .120 RD650385 - 3 X .120 RS HDG RD
Net Margin Yield Impact % Due to Pricing
Retail Margin Impact %
15
The top 5 SKUs account for about 76% of the net profit impact due to a pricing change
Price Elasticity Trends
0.340.350.360.370.380.390.400.410.420.43
Total Elasticity (Absolute Value)
16
Customers are more price sensitive during the high-season periods of April-October and less so from December-February. Overall price sensitivity
increased during the NLP period from June-August.
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