Modelling: reduces risk, boosts chances of success

How many customers am I going to lose by raising my price? How will a reduction in my competitor’s price effect my sales? Which promotional tool generates the biggest sales? Research under the title “Modelling and analysis” by Nielsen has the answers to questions like these. „Modelling and analysis” helps to minimise the risks of decision making increases the chances of success. Some companies spend millions a year without knowing how their promotional or price strategy will effect competitor products or the category. However, econometric modelling based on data from the past allows the structure of demand to be defined accurately. For example, we know from previous Nielsen research that price flexibility is high in Middle and Eastern Europe for categories like vodka, cooking oil, or washing powder. Price flexibility is moderate for condoms, shampoos, and premium whisky, while it is low for cigarettes or women’s deodorants. Let’s see an example. Let’s suppose, we have three products: A, B, and C. We know that “A” is sensitive to price, with a 1 per cent reduction bringing a 6 per cent increase in sales. At the same time, the 6 per cent increase is also due to the fact that we have taken away 2.1 per cent from our competitors and we have also cannibalised another 1.2 per cent from our own “B” and “C” products. “B” does not respond to a change in price so vehemently. As a result, a 1 per cent increase in price will generate a less than 1 per cent reduction in sales, which means a price rise can lead to a positive result. Though “C” has high price flexibility, a reduction in its price leads to an expansion in sales almost entirely at the expense of our other products, which means cannibalisation for us. The model has also been used in a European market to answer the following questions in the category of alcoholic beverages: 1. What part of sales could be achieved without promotion? 2. How much added value has been generated by the promotion? 3.Which tools have been the most effective? 4. Which promotion of our competitors had the biggest effect on our sales?