The world is grappling with a cost-of-living crisis. Inflation in many economies has created major challenges for both consumers and businesses. By most estimates, inflation is at its highest level in more than four decades in the US and some European countries. The current high inflation environment can be attributed to several different factors, many of which are a result of the Covid-19 pandemic. Supply-demand imbalances due to pent-up consumer demand after the pandemic was an initial driver, as were pandemic-induced supply-chain shortages. However, the war in Ukraine and the resulting disruptions in commodity and energy supplies has aggravated the situation. The International Monetary Fund projects that inflation will remain elevated for some time to come.
Inflation and pricing challenges
For businesses like Consumer Packaged Goods (CPG) and retail, that sell most of the daily-consumption goods that determine consumers’ cost of living, the current inflationary times pose a major challenge. With commodity prices up and cost of inputs increasing, CPG and retailer brands are seeing their margins erode and must make price increases to maintain margins. However, to do so without negatively impacting volumes or sales, they need to precisely measure the price elasticity of different products or Price Promoted Groups (PPGs). Every prouct or PPG has a different price elasticity i.e., consumers react differently to price changes of different products in terms of purchase quantity, purchase frequency, switching brands etc. Therefore, it is critical for brands to understand the extent to which they can increase prices for each without hurting their business.
Price elasticity: Normal vs inflationary times
Traditionally, brands run pricing analysis once every year or two. The insights from the analysis are used to make pricing decisions till the next analysis exercise. While this works well enough in normal times, it may not suffice in an inflationary climate such as the present time. The current situation demands that businesses continuously measure and analyze price elasticity to see how consumers are reacting to ongoing price increases across-the-board. For example, in normal times, when the price of Brand A increases, users are more elastic and may switch to Brand B. But when prices of all brands are increasing, they have limited choices and may continue to stick with Brand A. However, there will be a point – a threshold price – where consumers will change their buying behavior. They may choose to buy in smaller quantities or buy less frequently, which could shrink the
volumes of a brand or the entire category.
In the current environment, it is an imperative for brands to measure the price vs. buying behavior dynamic on an ongoing basis. This is key to helping them determine the extent to which prices can be raised to maintain margins and overall profitability.
Traditional approach to pricing analysis
The challenge is that price elasticity analysis – typically done by large consulting companies – is an expensive proposition. A comprehensive analysis requires businesses to do it not just for their own brands and SKUs but also for major competing brands and SKUs, as this has a direct impact on their sales. They must also run pricing analysis at a channel level since consumer profiles and demographics differ by channel, and consumers using different channels like hypermarkets, supermarkets or convenience stores may react differently to price changes. All this makes it financially unfeasible for many companies to conduct pricing analysis at the increased frequency they need to, in the current inflationary climate.
Analytic Edge’s approach with PriceSense
Analytic Edge’s offers a solution to this challenge. Our PriceSense platform is custom-built for pricing analysis. It enables scaled modeling and is highly automated with intuitive and user-friendly interfaces, making it easy to set up, run analyses, and generate insights. The platform can be licensed and deployed in-house and is also offered in a full-service consulting model, where Analytic Edge provides a resource to help run the analysis. It is highly cost-efficient, making it feasible for companies to run analyses on a more frequent or even “always-on” basis, and for more of their own and competitors’ brands and SKUs.
Some of the key benefits of Analytic Edge’s PriceSense solution include the following.
• In-House Option: It allows companies to run pricing analysis in-house, with adequate training and back-end support to get started. Brands can maintain their data and results on their systems, ensuring their information is protected.
• Full service Option: For companies that prefer to outsource pricing analysis, Analytic Edge provides a resource to run analyses and present results and recommendations.
• Cost-Efficient: It is extremely cost-efficient vis-à-vis solutions from large consulting companies.
• Always-On: Price elasticity analysis can be run more frequently in a nearly “always-on” mode, delivering continuous and near-real-time insights for brands.
• Scalable: Being cost-efficient, analysis can cover a much larger proportion of a company’s brands, SKUs or PPGs.
CPG and retail businesses today face a tough challenge. How should they adapt product pricing in the face of continued inflation and increasing cost of inputs to maintain margins while minimizing any unintended impact on volumes, overall profitability and brand preference? The solution is frequent price elasticity analysis that can support accurate, data-based decision making on pricing. And importantly, doing this in a way that is cost-efficient and scalable across their product portfolio. Analytic Edge’s PriceSense enables businesses to do just this and navigate the current environment.
To learn more about how PriceSense can help your business, contact us at [email protected]