Pricing Strategy

When it comes to increasing profitability, pricing is often the most powerful lever an organization can pull. Small changes in selling price can deliver meaningful growth to the bottom line. Despite this reality, pricing dynamics are often poorly understood by companies and, in turn, pricing strategy is undermanaged.

L.E.K. Consulting has deep experience helping clients define pricing strategies that support our clients’ value propositions and deliver profit improvement.

Our approach

We utilize a number of frameworks and techniques when developing winning pricing strategies. Examples include:

• Price elasticity: Quantify sensitivity of demand to pricing levels and changes
• Equity/attribute value drivers: Conjoint analysis to define utility of different attributes to consumers, revealing the importance of purchase drivers and enabling pricing based on consumers’ perceived value, not solely cost plus
• Differential pricing: Price tiers based on geography, brand and product role in the assortment
• Category and product roles mapping: Alignment of pricing benchmarks and rules to category/product roles
• Minimizing gross-to-net erosion: Isolate factors that drive the gap between gross and realized net price and strategically minimize each
• Price pack architecture: Combine consumer insights, competitive dynamics and a company’s capabilities to identify ideas, simulate/test results and drive new price pack architecture solutions

Successes

National discount retailer: We developed a sophisticated pricing framework centered on category and product clusters to define pricing rules. Solutions were based on rigorous price elasticity analytics, direct consumer feedback and conjoint analysis, and field testing. We formulated new pricing rules to reset pricing for SKUs throughout the store and designed an implementation plan. Ultimately, the new pricing strategy identified $50 million in gross margin improvement.

Fortune 100 consumer packaged goods company: We developed a successful price pack architecture strategy by conducting consumer research to evaluate the importance of package characteristics and running consumer simulations on various pricing/pack configurations to develop a pricing strategy around new product formats (e.g., smaller packs, zippers, etc.). The strategy identified an incremental ~$50 million in sales and ~$15 million in EBIT.

Leading national department store: We developed a comprehensive pricing strategy across all departments, with the goal of narrowing the price-value perception gap while improving margins. We designed department-specific pricing frameworks using multiple dimensions including price consistency, opening price point selection and price/value signaling. Additionally, we codified the procedures necessary to ensure implementation of the pricing strategies across the organization. This new comprehensive framework had a significant impact on the client’s price-value perception gap, enabling a more than $25 million improvement in sales and margin.

A premium snack brand: We developed a cohesive pricing and promotion strategy. First, we conducted a best practice and competitive environment assessment that considered the following factors: product pricing (ability to command premium vs. competitors, tiered structure — organic vs. regular); pricing and creation of unique price/pack “swim lanes” by channel (distributor vs. direct, club vs. grocery, geography, single-serve vs. multi-pack); promotions (depth, frequency, length, target, competition); and private label vs. branded. Our systematic recommendations also limited current strategies that undermined the client’s premium position and eroded profitability. As a result, we identified an additional $55-60 million in potential revenue and $11–12 million in potential EBIT.