By: Adelino de Almeida
My colleague, Dr. Ira Haimowitz, recently weighed in on the importance of pricing and promoting products correctly for major events, such as how much more beer is worth to a consumer during the Super Bowl than during the rest of the year.
To evaluate this, we use a methodology called utility-based pricing, and I think it’s an important one to become familiar with. Utility-based pricing hinges on determining the preferences consumers have for each attribute of a product, as well as for each level of each attribute. For example, do consumers find that a brand is more important than flavor? Is flavor more important than packaging? And in terms of attribute levels, is chocolate preferred over strawberry? These are just a few examples.
So why do we resort to utility-based pricing when designing pricing tactics for special events? Simply, traditional price and promotion models cannot determine pricing for special events. The same goes for pricing very slow-moving items and even everyday low prices (EDLP).
Finding price elasticities for special events such as the Super Bowl without employing utility-based pricing is difficult because these prices don’t vary much. With EDLP, a price may not change for eight months or more, which renders most classical analysis largely ineffective.
If we focus on modeling consumer behavior and preference, we can design price architectures for these special events as well as for slow-moving or EDLP items. That is, instead of accounting for historical price variations in order to design our price tactics, we use utility-based pricing to describe and quantify the decision process that shoppers undergo for each product in a category. Then we use this model to determine how much a typical shopper is willing to pay for each item at the time of a special event, i.e. how much more beer is worth during the Super Bowl.
By being able to evaluate the differential preference across these elements, utility-based pricing determines the value of each product configuration and, ultimately, the amount that consumers are willing to pay for each item. This approach depends less on the historical price variations for a product than on the value that consumers realize from using it, and allows us to price items that move very slowly or have low price variances.
As Dr. Haimowitz discussed, determining the price of beer during the Super Bowl becomes an exercise in determining first the value that consumers assign to beer on an on-going basis, and then adjusting it for the value that they assign to having beer during the Super Bowl. So, although classical approaches to leveraging price elasticity are robust and essential to the operation of a business, those approaches must be replaced by utility-based pricing whenever you intend to price optimally for a special event.
And frankly, all this talk of beer is making me thirsty, Super Bowl or not.