Pricing to demand curve is
a really important concept. So I'd like to show you a couple of tools,
and then give you a few tips on
how to do it in practice. I was having a meeting with
the CEO of NewFood the other day. We were talking about opportunities
in his business and pricing. And at a certain point, he said "I
wonder how well we price to demand. Actually, I'm pretty
sure we are missing out!" And with that,
he asked me to look into it. NewFood is a fast food chain with 1,000
stores and roughly a $800 million sales. They have pretty much one thing they sell,
and these are hot dogs. And they got two product lines. Something more traditional,
around 60% of the business, and another product line that is
organic, around 40% of the business. They are competing with two companies out
there "Frankies" and "Dawg Day." Now, how do I look into pricing to demand for
a business like this? I'm using three tools or techniques. The Price Piano, the
Price ladder,
and the Incentive curve. The Price Piano is really about understanding
the hot price points in the market. The Price ladder is a way to
visualize how systematically you differentiate your products and your
prices, and compare this to competition. And lastly, the Incentive curve is around,
what's the right package size and the price per use. Double clicking into the price
piano. Now you start seeing why
we call it Price Piano. Because you have all these keys, and these
keys here represent a certain price range. Here we go in 50-cents increments.
When I deal with items under $10, I usually go in 10-cent increment. So fairly
granular. And now we start plotting on this keyboard, the keys where your customer
has the actual price points. So in the traditional
product line NewFood has four products, one at $2.59, one at $2.99,
then $4.59 and $4.99. And in the organic, they have also
four products starting at $2.99 and then basically going in 50-
cent increments up to $4.49. You do the same with your competitors and
Frankies has three hot dogs they sell: $2.99, $3.99 and $4.99. And Dawg Day has
four at $2.99,
$3.24, $3.99 and $4.24. So this gives you a visual way of what price ranges are
used, and where does everyone stand
or sit on this keyboard. Now, I promised you that the price
ladder is about hot price points. And hot price points, are price points
that are hit by most of the market players, and where you expect
a lot of demand to take place. In this example here it's $2.99 because virtually
everyone
has an offering for $2.99. Three of the four have
an offering at $3.99. And arguably,
even the $4.99 is a hot price point. And there are two kinds of rationales,
how you want to deal with price point. One is, you purposefully want
to be on this price point, because you want to play in
this specific price range. Or you're systematically try
to undercut the price points, or be slightly above it if your product
differentiation allows you that. The next thing you can see on a Price
Piano is what are the open price points? And we highlight it here in green. So, you
could, for example discuss,
nobody is offering anything below $2.59, should you, with your traditional
offering, go into this price base? And I would argue with the $2.59, we already are
at the low end of it, there's
really no reason to go even lower. The next thing is we see a pretty
big gap jump from $2.99 to $4.59. Whereas, some of our competitors
actually have something in between here. And even our organic product
line has offerings in here. So, this is clearly an area when we say,
there should be something in here in your tradition line up. Then lastly,
the question is can you go beyond the $4.99? And expand into this space. And here
the question is or the point is with traditional
maybe not, nobody is higher? But it's clear with organic why are you
50 cents below your traditional offering? So here might be a bigger opportunity
to consider going up here. Should you go with the organic below $2.99? Maybe. Maybe
if there's a lot of demand at
the $2.59 that you want to migrate over. But again since no competitor
is offering at this price, I wouldn't suggested it as an opportunity for
now. There's another way to use the Price
Piano, and that is not only comparing your competitors, but even comparing
with your competitors by channel. So for Frankies for example, we found
that if they have a regular location, they charge $2.99, $3.99, $4.99. But in point
of interest locations, for example at an airport, for
example in a stadium, they actually charge $3.49,
$4.49, and $5.49. So they have a 50-cent increase for
the same product. Now, NewFood,
our client is not doing that at all. So that might be an idea for
us to look into. So to recap: Price Pianos are about the hot price
points and opportunities around them. You try to understand the market, first
of all, what other hot price points, and then you check, do we really cover
them with our product line up? Then, are there open price points or
open price ranges? And the opportunity here
is could we occupy them? Which probably requires new offerings or
an adjustment to your offerings. And the last point we discussed was do
the hot price points vary across channels or major retailers? And do we vary our
prices accordingly?
