Measuring Pricing Effectiveness: The Process (Part 2 of 2)

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This is the 2nd part of a 2-part series.  Read my previous blog Measuring Pricing Effectiveness: Key Metrics

Deciding what metrics to measure leads to the next big issue:  How to Measure.  Often the problem is not so much in the measuring but in the comparison.  Measuring the revenue is only useful if you can compare it to a baseline of revenue to know whether the result is good or not.  Summarized, there are four basic techniques, each with advantages and disadvantages:

Test and Control: Typically execute new pricing in some locations while using the legacy process in others.  Best if the stores are matched for size, type, and trend.  

  • Pro: Allows for direct comparison of results in a controlled environment. 
  • Con: Hard and impractical for many organizations to do – especially where pricing is not by location.  Also, this method doesn’t help after the new pricing process is fully deployed.

Pre-Post Trend: Compares the trend in the measures (usually against prior year) before and after the new pricing is deployed for some period of time (months to a year).  The change in trend is attributed to the pricing impact.

  • Pro: Normalizes the performance trend and ties nicely to financial results for the business.
  • Cons: In reality, not all change is from the pricing change.  There are many possible reasons for trend changes.  Also, it does not help after a year.  Finally, the process of trending is tedious and prone to an argument about what to include in the trending.

Last Year: The simplest.  Straight year over year comparison. 

  • Pro: Easy and ties directly to financial results. 
  • Con: Changes often have little to do with pricing.  Also, would only work for one year, if you did adopt this methodology.

Versus Expected:  Most pricing systems will provide a forecast for what was forecast to happen if the recommended prices were taken.  This can be compared with what was taken. 

  • Pro: Easily available and comparable data and can be applied year after year.
  • Con: Assumes that the forecast itself is not part of the issue – so it is at best directional in nature.

So with all the methods, what is recommended?  As seen above, there is no sure, 100% accurate way to show the value gained from your pricing implementations.  So does that mean you should not do it?  Absolutely not.  Rather, you need to be aware of their limitations but also keep your eyes on some more standard measures:  on-going weekly margin rate to ensure the base profitability is in range, unit sell-through to monitor the inventory levels, and dollar sell-through to ensure pricing is maximizing the revenue over time.  While certainly useful to produce these measures at a detailed level, monitoring the department level values is great for on-going health and productivity checks with deeper dives made when one or more of the measures start to deviate significantly.  Sometimes it is useful to index each department’s level for each of these three measures against the chain to keep track of department trends.  Over time, these measures are a better measure of success.