• by Rishi Bhandari , Doug Brooks , November 7, 2007

While marketers are jumping on the marketing accountability bandwagon and are using ROI to determine where best to spend their marketing dollars, they still need to keep an eye focused on pricing. Otherwise, a pricing misstep could deflate the impact of marketing efforts and hurt the overall business. It may seem obvious that you need to focus on pricing, but developing a pricing strategy is far from easy.

That's because building a premium brand and meeting short-term sales objective are often at odds. A premium brand brings along the benefit of equity that allows companies to charge a premium price while providing insulation from competitors. But equity doesn't come overnight; it requires an investment in brand-building activities over a long period of time and many companies just don't have the patience to wait or are unwilling to invest.

As pressure continues to mount from shareholders and senior management to "make the numbers," marketers may surrender to the quick fix of promotion-driven marketing. The result is the downward spiral of eroding brand equity and the creation of a consumer base that is trained to buy on deal and extremely price-sensitive.

For many brands, not promoting is not an option, but there is an opportunity to optimize promotional cadence and better manage discounts. The key is striking a balance between brand building and discounting/promotion. Enter price elasticity analysis.

This form of statistical analysis allows you to understand the optimal price points for your products, the ideal price gap between your brands and that of competitor brands, and the optimal promotional cadence required to achieve sales goals. Leading companies today are doing price elasticity analysis to answer questions such as:

• How many promotions do I need to execute to make my numbers? Could I do fewer?
• What is the optimal price point? Could we generate the same sales with a lesser discount?
• Is there an opportunity to raise price?
• How price sensitive are consumers by segment and by account?

For example, one Fortune 500 retailer was caught up in the trend of constantly placing entire categories of products on deal. What this retailer found was its consumers were not as price sensitive as it might have thought. It discovered that it didn't need to price promote all items equally in a category, and it didn't need to promote as often as in the past.

This retailer was able to reduce the number of promotions for key products within a category during the back half of the year and use those dollars to fund incremental brand-building activities. As a result, the retailer was able to maintain sales, improve its margin during this period and invest in the long-term health of its brand.

This analytical approach can be used to help many companies to:

1. Increase profits by selling more items at a premium price, and execute the minimum number of promotions required to achieve short term sales goals.
2. Un-train consumers who have become obedient on-deal purchasers.
3. Support the re-positioning of a brand.
4. Better manage relationships with key accounts and retail partners.

Rishi Bhandari and Doug Brooks are vice presidents of Marketing Management Analytics.