Using price modelling to uncover strategic insights requires caution, however, and it is important to have a clear understanding of which questions can be addressed with a pricing model.

ACNielsen's pricing studies are based on regression modelling of weekly store level data - this allows the matching of brand volume changes to known price changes in-store. In the first stage, an assessment of price sensitivities, thresholds and relationships is undertaken. The next stage involves providing recommendations for future price and promotional strategies and, finally, the new regular and promotional pricing scenarios are tested.

Econometric modelling uses the recent past to predict the near future. It is suitable for answering the following questions:

• How sensitive is my brand to promotional price and changes in regular price?
• Who are my brand's key price competitors?
• Are there any critical price thresholds?
• What is the impact of changing the price gap to sister and/or competitor brands?
• Which pricing strategy should I apply to the different packs in my portfolio?
• What is the volume, value and profit impact of new price scenarios?

It is, however, not suitable for answering questions such as:

• At which price level should I launch my new brand?
• How will exceptional price changes affect my brand's price senstivity and sales? eg:
  - Prices reach a new low in a price war
  - Prices increase substantially
• How will dramatic market changes (ie recession, political conflict) affect my brand's price sensitivity and sales?
• How will significant changes in my brand's benefits (ie quality, format) affect my brand's price sensitivity and sales?

In the event that historical data observations are insufficient to draw reasonably robust conclusions, ACNielsen uses other analytical approaches to align price and profitability for better brand performance.

The current preference for price modifications appears tilted towards afondness for price cuts. The tendency to cut prices as a way of stimulating change needs to be evaluated very closely with the manner of change it could bring about. Price cuts have a definite and tangible adverse impact on profitability. For a brand with a 20% profit margin and a similar retailer margin, a price cut of 1% results in a 5% decrease in profit margin and implies a required rise of 5% in sales to offset this loss of profitability. Clearly, consumers are not always seeking price reductions for the sake of reduced prices, but because they are looking to discover value. The focus therefore should be on creating value for consumers rather than destroying profitability.