The 4 Ps: Product, Price, Place, Promotion

By: EconomyWatch   Date: 29 June 2010

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Historically marketing was defined by the 4 Ps. Although the power of the 4 Ps has dimmed over time, it is still a useful construct, particularly to help model and measure the tactical aspects of the sales and marketing process, and their impact on the bottom line.

Metrics Covered: Unit Cost/ Margin, Factor Analysis & Regression, Price Premium, Reservation Price, Optimal Price, Percent Good Value, Price Elasticity of Demand, Baseline Sales, Incremental Sales, Redemption Rates

The margin achieved on the sale of an item seems fairly straight forward, but can to much confusion on 2 fronts

How are discounts, offers, rebates, gift card/ miles redemptions, returns etc handled? They could show up as either revenue or cost items (but not both). Either way the unit margin $ is the same, but the margin % will vary

Margin is normally a percentage of the sale price, whereas markup is the percentage of cost price. However some organisations (particularly in retail) think of margin is percentage of cost price

Make sure you all agree on definitions and standardize for internal and external reporting

Metrics: Channel Margin

The Question:

What is the margin along the supply chain?

Approach:

Analyze 'chained' margins individually or as a whole

Commentary:

The margin within the chain is the difference between buying price and selling price at any point (from manufacturer to distributor, distributor to wholesaler etc). Total Channel Margin is the difference between original cost and final consumer sale

The Formula:

Channel Margin ($) = Final Consumer Price ($) – Original Cost ($)

Metrics: Reservation Price & Optimal Price

The Question:

Reservation Price: Above what price will a customer not pay?

Optimal Price: At what price do I make the most money?

Approach:

Plot demand against price. The lowest price at which no-one will buy is the Reservation Price, the optimal price is that where demand * price yields the highest number

Commentary:

Get data from surveys or live trials across price-points

The Formula:

Reservation Price = Price above which customers won't buy

Optimal Price = [Reservation Price ($) + Variable Cost ($)]/ 2

Metrics: Percent Good Value

The Question:

How many people think my product is good value at a given price?

Approach:

Survey customers across a range of price points

Commentary:

Determining reservation price can be extremely difficult. Percent Good Value sureys are often used to determine Linear Price-Demand charts and project Reservation Prices

The Formula:

Percent Good Value (%) = Respondents Saying Good Value/ Total Respondents

Metrics: Price Elasticity of Demand

The Question:

How much will demand change if I change the price?

Approach:

Analyze the change in demand at different price points, all other things being equal

Commentary:

Extremely difficult to calculate, but can lead to significant increases in revenue and 'premium' perceptions if done correctly.

The Formula:

Price Elasticity (I) = Change in Quantity (%) / Change in Price (%)

Metrics: Distribution Metrics The Question: How what is my market access through retailers?

Approach: Analyze in-store product availability as a share of total

Commentary:

These metrics are vital for marketers who sell through retailers. Balancing efforts to 'push' (building & maintaining retail/ reseller/ distributor support) and 'pull' (generating demand from end customers) becomes the strategic objective.

The Formulas:

Numeric Distribution (%) = Shops with Brand (#)/ Total Shops (#)

All Commodity Volume (ACV) Distribution (%) = Total Sales at Shops with Brand ($) / Total Sales all Shops ($)

Product Category Volume (PCV) Distribution (%) = Category Sales at Shops with Brand ($) / Cat. Sales all Shops ($)

Category Performance Ratio (%) = PCV (%)/ ACV (%)

Metrics: Markdowns

The Question:

How much are prices reduced in promotions?

Approach:

Look at total reductions as a percent of full prices

Commentary:

Helps both retailers and co-promotional partners to understand if promotions have been negatively affecting revenues and profits

The Formula:

Markdown (%) = Reduction in Price of SKU ($)/ Full Price ($)

Metrics: Direct Product Profitability

The Question:

How profitable is each product sale?

Approach:

Adjusted gross margin less direct product costs

Commentary:

Simple in concept, product profitability can be a challenge in practice. You need to calculate gross margin, rebates and finance costs, warehouse costs, transportation costs and store costs

The Formula:

Direct Product Costs ($) = Warehouse, Transport & Store Costs

Direct Product Profitability = Adjusted Gross Margin ($) – Direct Product Costs ($)

Metrics: Redemption Rates, Cost Per Redemption

The Question:

How successful are my coupon-based campaigns?

Approach:

Analyze coupon usage rates and costs

Commentary:

These measures look at the short term effects of coupon usage. We need to look at Promotional Lift to understand long term effects of promotions.

The Formula:

Redemption Rate (%) = Coupons Redeemed/ Total Coupons

Cost Per Redemption ($) = Face Amount ($) + Redemption Charges ($)

Metrics: Promotional Lift

The Question:

How much have my sales increased due to a promotion?

Approach:

Analyze what sales incremental vs what sales are baseline

Commentary:

Easier said than done. Many complex variables enter into sales trends, so determining what sales would have happened anyway version those 'lifted' by a promotion can only be estimated. Use customer spending patterns, seasonality, regression analysis etc

The Formula:

Promotional Lift (%) = Incremental Sales ($,#) / Baseline Sales($,#)

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