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Understanding seasonal discounts to create a dynamic pricing strategy
Leading drinks brand
Challenge
How do you create a pricing strategy that adapts to seasons and takes into account consumers’ reactions to different packaging sizes?
Facing consumer behaviour shifts, alterations in the US tax regime and an international marketplace, a multinational drinks manufacturer needed an optimal, dynamic pricing strategy and plan for its signature liqueur.
To anchor its approach in customer insights, we were tasked with determining the best discount seasons and assessing the impact of discounting larger packs on smaller packs.
Research
To capture the complex decision-making process that takes place during even small purchases, we used implicit testing to measure customers’ intuitions about in store price points. This approach combined virtual shelf displays with statistical techniques.
We created a set of scenarios to address pricing, format and discounting in a competitive landscape. Each scenario consisted of a virtual shelf display with a range of bottles of alcoholic drinks, including different pack sizes of the client’s liqueur together with a number of competitor products. Bottles displayed a price tag of either the undiscounted price or both the sales price and original price.
We set up tests where each participant was asked to choose which pack they would buy and for which occasion, for instance, to:
- Relax and unwind with partner or friend
- Provide a ‘sweet finish’ to a meal at home
- Share with friends or family at an event or celebration
- A treat for tonight
By systematically varying the prices of the different packs, we collected significant data to show how demand varied for different pack sizes under different pricing and discount scenarios. Using a Bayesian approach with Monte Carlo Markov Chain probabilistic programming techniques, we used the data to built a detailed model of how consumers responded to changes in price for different pack sizes of the liqueur.
Findings
Price dynamics are not linear. Overall, consumers were highly price-sensitive to 70cl packs, leaving little room for price increases. But pricing for 1L was more complex. As discounts on the 1L bottle increase, consumers shift from the 70cl pack. But, this transition doesn’t offset the decrease in demand for the 70cl bottle. This implies that offering substantial discounts on the 1L bottle might be counterproductive and could undercut brand equity.
We found location can dramatically effect ideal pricing points. In the UK, it was possible to increase prices in all the sizes tested, especially during the Christmas season. There was little room for movement on price in the US, with discounts substantially increasing demand. in Germany, big discounts were not recommended as the brand was strongly viewed as a luxury product.
We also found that the occasions when people would drink the liqueur changed depending on pack size. The 100ml pack was seen as being good as a sweet finish to a meal where the 200ml version was viewed as a treat for tonight.
These considerations give an insight into the complexity of the decisions surrounding pricing strategies. To help create the right way forward for this brand, we identified:
- The pack sizes for which a price increase was feasible.
- Discounting plans to increase total demand without hurting profitability, for example quantifying how short-term promotions would work for the largest pack sizes.
- The price points for different pack sizes to tempt consumers to switch to smaller or larger pack sizes to increase total revenue.
With all these insights, the brand was able to create a dynamic pricing strategy that adapts to changes in season and behaviour.
