7. Why your price band is wider than it should be

7. Why your price band is wider than it should be - 116 THE...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 116 THE McKINSEY QUARTERLY 1998 NUMBER 3 P ACKAGED GOODS COMPANIES have long recognized that pricing is a key lever in managing brands for profitability. Even so, pricing is so underleveraged in practice that improving price management can raise margins by as much as 5 percent. Companies seeking to capture this potential must not only make eƒforts to understand the behavior of consumers but also find ways to apply this understanding to the thousands of front-line pricing decisions they make every year. This opportunity exists because of a widespread assumption that marketing departments set prices and make them eƒfective. Yet any consumer’s shopping experience will demonstrate that this is a misconception. MARKETING Too many ad hoc pricing decisions Key determinants: consumption expandability and brand equity Consider competitors and channels last Not long ago, an acquaintance bought a box of cereal for $3.79. He was unhappy because he had paid $2.49 for the same brand in the same supermarket just two weeks earlier, when he had also used a 75¢ coupon to pay a net price of $1.74. To add insult to injury, he knew that a nearby supermarket always sold this brand for $2.99. These variations in price confused him. In fact, they are entirely normal, and centralized pricing decisions are responsible for very few of them. THE McKINSEY QUARTERLY 1998 NUMBER 3 117 K. K. Davey is a consultant and Andy Childs is a former consultant in McKinsey’s New Jersey oƒfice; Steve Carlotti is a principal in the Chicago oƒfice. Copyright © 1998 McKinsey & Company. All rights reserved. K. K. S. Davey Andy Childs Stephen J. Carlotti, Jr TELEGRAPH COLOUR LIBRARY In category aƒter category, the end prices consumers pay for the same goods vary widely. Some variations result from promotions by manufacturers, such as temporary price cuts, circular ads, coupon ads, end-of-aisle displays, pre- price packs, and bonus packs. Within a channel, prices vary as a result of retailers’ pricing and promotion strategies, such as EDLP or hi-lo,* double- couponing (the process by which a retailer oƒfers to double the face value of a manufacturer’s coupon for shoppers in its stores), and loyalty cards. In addition, prices vary from channel to channel because of diƒferent value propositions: convenience at a higher price or less variety and service at a lower price, for instance. These variations apart, consumers themselves adjust pricing by responding to consumer promotions, notably free-standing inserts, checkout coupons, and on- pack coupons. We call this range of prices for an SKU (stock-keeping unit) within a market the consumer price band (Exhibit 1). At most packaged goods com- panies, the complex decisions about list prices, trade pro- motions, and consumer pro- motions that drive the con- sumer price band are made by several diƒferent internal organizations, each inspired by its own goals or definitions of success. Prices controlled centrally by senior manage- ment reflect a company’s rev-...
View Full Document

Page1 / 12

7. Why your price band is wider than it should be - 116 THE...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online