Pricing and promotions Assignment PDF

Many retailers underestimate the value of coordinating decisions on
pricing and promotions. A new analytics approach can help.
T he scenario is a familiar one to e-commerce retailers: a supplier increases prices
on an item, so a category manager increases the item’s selling price. But this e ort
to make sales of the item more pro table is promptly undermined by a well-intentioned
marketing manager, who lowers the price of the item by 20 percent as part of a promotion.
Such uncoordinated and counterproductive decisions happen much more often than most
retailers realize, and they are expensive. Many promotions don’t turn a pro t at all, or at
least they don’t add nearly as much pro table revenue as retailers expect. Addressing this
con ict can quickly turn into a game of cat and mouse, in which retailers nd themselves
constantly chasing the next issue in a highly reactive way. Sometimes they simply avoid the
problem by keeping prices low or making small adjustments across the board, in e ect
creating a permanent discount on their entire assortment.
DOWNLOADS
 Article (6 pages)
Pricing and promotions: The analyticsPricing and promotions: The analytics
opportunityopportunityJune 28, 2021June 28, 2021 | Article| Article
By Claus Heintzeler, Mathias Kullmann , Karin Lauer, and Maximilian Totzauer

With better analytics, though, e-commerce retailers can create value by intelligently linking
pricing and promotions based on optimal price setting and promotion design. We have
observed, for example, several innovative e-commerce retailers increase revenue and
pro ts by three to ve percentage points using a highly di erentiated analytics process
and often achieve improved customer satisfaction and loyalty as well.
Companies that e ectively and pro tably link pricing and promotions through advanced
analytics engage in the following three-step process, which rst determines customer
price sensitivity, then gauges the likely e ectiveness of promotions for every product, and,
nally, links the two:
1. Use a wider range of factors to
determine price sensitivity
A price-sensitivity score considers the extent to which customers perceive a product’s
price and, as a result, react to price changes. If a product has a higher price-sensitivity
score, it means that a customer is less likely to accept a price increase. In this case, the
price should be kept at a competitive level. (For more on dynamic pricing, see “ How
retailers can drive pro table growth through dynamic pricing .”)
While most companies consider price sensitivity when they make pricing decisions, the
scores often don’t incorporate enough factors and thus aren’t as accurate as they could
be. The best price-sensitivity scores are calculated with advanced analytics, using input
factors that take customer, competitor, and company considerations into account. For
instance, price elasticity is based on di erent models for each product category, because
customer behavior, including purchase frequency and reaction to price changes, di ers for
each product. By aggregating individual input factors for price sensitivity and promotion

a nity, individual scores for each product category can be developed. With price
sensitivity identi ed for all products, items are then grouped into three buckets based on
their scores:
Key value items: top sensitivity. These are everyday products, such as common
grocery items, whose prices most customers know, making it easy for them to
comparison shop. As a result, customers are especially price sensitive when it
comes to these products, and their prices must be competitive. These products
typically account for 10 to 20 percent of a retailer’s sales. Investing in keeping their
prices low pays o in signi cantly better customer price perception, which leads to
more frequent visits and larger baskets.
Foreground items: midlevel sensitivity. These are items that have attributes that are
more important to customers than price and hence do not require as great a degree
of competitiveness in pricing as key value items. However, their prices should be
competitive enough to avoid any negative impact on customers’ price perception.
Prices for these items can be set within a range that falls between, for example, the
highest and lowest competitor prices, or the minimum margin and recommended
retail price.
Background articles: low sensitivity. The items in this bucket are either products for
which price is not an attribute that customers focus on much at all, or products for
which a price comparison isn’t possible. Correspondingly, the products in this bucket
o er the strongest opportunity for retailers to nance their investment in low prices
for the key value items.
2. Build a clearer picture of where to
target promotions