Intro to Pricing and Promotion Models

This course will help you understand the basic principles of Pricing and Promotion models, the process flow, and how it relates to working on P&G category businesses.

Intro to Price and Promo Methodology

What is a Pricing and Promotion (PnP) Model?

PnP models evaluate the effects of pricing and promotion events on consumer purchase behaviors.

  • We extract disaggregated store level data.  This means a lot of observations and therefore a higher reliability in the results
  • The model is a system of equations that controls for extraneous variables, e.g. seasonality, distribution, or assortment that may be affecting an item’s volume. This allows to get a “pure” impact of price and promotion.
  • As a result we are able to determine the impacts of promotions across various price cuts and types of quality support and also predict the percent change in an item’s volume as generated by a percent change in item’s regular price.
  • Nielsen methodology has been endorsed by both the P&G Technical Council and IBO Leadership as the preferred methodology to evaluate pricing strategy.

What is included in a PnP Model?

A PnP Model takes into consideration data from each store, week, and UPC. Product (PPG) sales are decomposed based on own and competitive price and promotion execution information. The model is run as a Hierarchical Linear Model (HLM). This is simply a variation of a fixed and random effects multiplicative regression which reduces the influence of outliers on model estimates. 

Why don't we measure PnP at total brand or channel level?

Using store level data allows us to elimate aggregation bias from the models.

There are two forms of aggregation bias that could lead to attempting to measure events that actually were not realized in market. This could lead the client to draw incorrect conclusions on the effect of price and promotion plan changes to their sales.

Masked Variation

In this example, there are meaningful price changes and resulting volume changes at the store level, but those are washed out when aggregating up to the market level. 

If this were modeled, a conclusion could be drawn that there was no price change for the product and no sales impact realized. However, we know there was significant price change felt by consumers during that time period and sales changes due to price variation.

False Variation

In this example, there are no changes in price at the store level, but fluctuations in volume lead to price changes when aggregating up to the market level.

If this data were modeled, we could be attributing sales changes to price when in reality it was likely outside factor's influencing consumer choice decisions.   

What are the client questions that can be answered with PnP?

Pricing Questions

  •  How do my products respond to everyday (base) price changes?
  • What drives consumer sensitivity to my products’ everyday (base) price?
  • How do my products’ sales respond to changes in promotional pricing?
  • What is the approximate volume or $ impact of  LPI/LPR (line price increase or reduction) on my products/brand?
  • What happens to my products’ sales when my key competitors take an LPI/LPR? 

Promotion Questions

  •  What is the incremental sales lift by promotion type/discount to my product/brand when my product is promoted? What is the incremental sales lift to the overall category?
  • Am I promoting the products that are incremental to both P&G and to the retailer?
  • Which of my products drive the most volume/$’s when on promotion?
  • When the competition promotes, how does this impact my products’ sales?
  • Am I promoting my products at the right frequency and with appropriate depth of discount? What is the cost of additional discounting? 

Price & Promotion Strategy

  •  How does consumer sensitivity to base and promoted price differ across my portfolio/retailers/channels?
  • Which promotional tactics should I be prioritizing across my portfolio/retailers/channels?

Is the following statement True or False?

  • The PnP model measures data at the channel level.

Is the following statement True or False?

  • The PnP model measures the impact of display event activity.

The following business question can be answered with PnP (True or False).

  • What is the effectivness of the Always "Like a Girl" TV campaign?

Key Pricing and Promotion Terms

What is a PPG?

Price Promoted Group

Definition

A PPG is a group of UPCs that are priced and promoted the same way, i.e. trade tactics and prices have high positive correlations.

Simplified

A group of products that are priced similarly and promoted together; these products may be different varients (scent, flavor, or color).

Consumer Story

When I went to Meijer yesterday to buy my favorite deodorant, there were a lot of scents to choose from, but they were all on sale for the same price!

What is %ACV?

Percent All Commodity Volume

Definition

The sum of the projected all commodity sales volume (ACV) for stores with sales of the product (or for a promotional activity: stores with sales of the product on promotion) during at least one week of the selected period divided by the sum of the projected ACV for all stores during the period.  Can be expressed for a particular geographic area, retail outlet type, key account, or RMA.

Simplified

% of stores that carry the item while accounting for the size of the store.

Consumer Story

I can buy the same brand of shampoo at any of the stores that I regularly shop.

What is TDP?

Total Distribution Points (TDP)

TDP differs from ACV as it provides a measure of not only how widely distributed a brand is across a market (%ACV) but also how many items are selling where the item is in distribution (Avg  # of Items).

Definition

Measures both the breadth and depth of distribution or promotional activity. It is the sum of the UPC level % ACV for the product or promo activity being measured.

Simplified

Measure of market penetration that is inclusive of stores selling and number of items selling within the store

Consumer Story

I can buy the same brand of shampoo at any of the stores that I regularly shop, but when I am looking to purchase my hair color, only CVS has the exact shade I want.

What is incremental lift?

Definition

The incremental sales sold above the baseline volume while a product is on promotion

Simplified

Increase in sales/units from other brands or new consumption

Consumer Story

I saw Old Spice deodorant on a nice display at the end of the aisle while shopping at Kroger so I purchased it instead of Mitchum.

What is the difference between elastic and inelastic?

Definition

Price sensitivity to a product is considered elastic if the measured elasticity is less than -1 (ex. -2.3). A product is considered inelastic if the measured elasticity is greater than -1 (ex. -0.5)

Simplified

Elastic: If the consumer sees the base price change past their perceived threshold then they are less likely to buy.

Inelastic: If the consumer sees the base price change, but it has not passed their perceived threshold (or RTB is high enough vs threshold), they are still likely to buy.

Consumer Story

Elastic: Bounty Paper Towels are definitely better than others, but I can't justify paying $5 more than Target Up & Up.  After all, they both clean up spills and messes.

Inelastic: I swear by NyQuil when I'm sick.  Even though it's more expensive than other products, it works so well and helps me get better quickly that I'll continue to buy it despite the price difference.

What is feature?

Feature Ads

Definiton

Feature ads (often called simply “features”) consist of individual printed advertisements of consumer packaged goods on promotion and are usually sponsored by the retailer.

Simplified

Weekly newspaper ads that retailers send out showing the items that are on sale

Consumer Story

I find out what items are on sale/special by looking at the newspaper ad that I receive in the mail or pick up in the front of the store.

What is display?

Displays

Definition

A merchandise arrangement is a display if it is an additional location (a location that is not the normal location for the item e.g. in the aisles) for the product that is on: 1) an endcap, 2) stand alone arrangement/fixture, or 3) store perimeter and there is the presence of any one of the following observable facts: 1) temporary price reduction (TPR), 2) point of purchase (POP)/manufacturer name/logo, 3) significant number of facings.

Simplified

A prominent showcase of a product in-store in a place where it can be easily seen.

Consumer Story

I needed to purchase shampoo and before I even entered the hair care aisle, I saw that Pantene was displayed at the end of the aisle.

What is depth of discount?

Depth of Discount (DoD)

Definition

The average observed discount for the selected promotions for the item in the market for the selected period.

Simplified

The percent discount on a promoted item.

Consumer Story

Last time I was at Walgreens, they had Covergirl on sale for 25% off!

What is Co-Distribution?

What is down or upcounting?

What are price thresholds?

What is co-promotion?

Understand Key PnP Milestones

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Key PnP Deliverables

Key Deliverable