Pricing to demand curve is a really important concept. So I'd like to show you a couple of tools, and then give you a few tips on how to do it in practice. I was having a meeting with the CEO of NewFood the other day. We were talking about opportunities in his business and pricing. And at a certain point, he said "I wonder how well we price to demand. Actually, I'm pretty sure we are missing out!" And with that, he asked me to look into it. NewFood is a fast food chain with 1,000 stores and roughly a $800 million sales. They have pretty much one thing they sell, and these are hot dogs. And they got two product lines. Something more traditional, around 60% of the business, and another product line that is organic, around 40% of the business. They are competing with two companies out there "Frankies" and "Dawg Day." Now, how do I look into pricing to demand for a business like this? I'm using three tools or techniques. The Price Piano, the Price ladder, and the Incentive curve. The Price Piano is really about understanding the hot price points in the market. The Price ladder is a way to visualize how systematically you differentiate your products and your prices, and compare this to competition. And lastly, the Incentive curve is around, what's the right package size and the price per use. Double clicking into the price piano. Now you start seeing why we call it Price Piano. Because you have all these keys, and these keys here represent a certain price range. Here we go in 50-cents increments. When I deal with items under $10, I usually go in 10-cent increment. So fairly granular. And now we start plotting on this keyboard, the keys where your customer has the actual price points. So in the traditional product line NewFood has four products, one at $2.59, one at $2.99, then $4.59 and $4.99. And in the organic, they have also four products starting at $2.99 and then basically going in 50- cent increments up to $4.49. You do the same with your competitors and Frankies has three hot dogs they sell: $2.99, $3.99 and $4.99. And Dawg Day has four at $2.99, $3.24, $3.99 and $4.24. So this gives you a visual way of what price ranges are used, and where does everyone stand or sit on this keyboard. Now, I promised you that the price ladder is about hot price points. And hot price points, are price points that are hit by most of the market players, and where you expect a lot of demand to take place. In this example here it's $2.99 because virtually everyone has an offering for $2.99. Three of the four have an offering at $3.99. And arguably, even the $4.99 is a hot price point. And there are two kinds of rationales, how you want to deal with price point. One is, you purposefully want to be on this price point, because you want to play in this specific price range. Or you're systematically try to undercut the price points, or be slightly above it if your product differentiation allows you that. The next thing you can see on a Price Piano is what are the open price points? And we highlight it here in green. So, you could, for example discuss, nobody is offering anything below $2.59, should you, with your traditional offering, go into this price base? And I would argue with the $2.59, we already are at the low end of it, there's really no reason to go even lower. The next thing is we see a pretty big gap jump from $2.99 to $4.59. Whereas, some of our competitors actually have something in between here. And even our organic product line has offerings in here. So, this is clearly an area when we say, there should be something in here in your tradition line up. Then lastly, the question is can you go beyond the $4.99? And expand into this space. And here the question is or the point is with traditional maybe not, nobody is higher? But it's clear with organic why are you 50 cents below your traditional offering? So here might be a bigger opportunity to consider going up here. Should you go with the organic below $2.99? Maybe. Maybe if there's a lot of demand at the $2.59 that you want to migrate over. But again since no competitor is offering at this price, I wouldn't suggested it as an opportunity for now. There's another way to use the Price Piano, and that is not only comparing your competitors, but even comparing with your competitors by channel. So for Frankies for example, we found that if they have a regular location, they charge $2.99, $3.99, $4.99. But in point of interest locations, for example at an airport, for example in a stadium, they actually charge $3.49, $4.49, and $5.49. So they have a 50-cent increase for the same product. Now, NewFood, our client is not doing that at all. So that might be an idea for us to look into. So to recap: Price Pianos are about the hot price points and opportunities around them. You try to understand the market, first of all, what other hot price points, and then you check, do we really cover them with our product line up? Then, are there open price points or open price ranges? And the opportunity here is could we occupy them? Which probably requires new offerings or an adjustment to your offerings. And the last point we discussed was do the hot price points vary across channels or major retailers? And do we vary our prices accordingly?
