Three steps to determine whether a price change has been successful

A large restaurant chain decided to increase the price of its main product in response to temporary cost pressures. The company had a pricing management tool that had suggested not raising prices, as they were already above the fair price—they were perceived as “expensive.” Ignoring this recommendation, the board ordered the price increase. When evaluating the results of the change, they “celebrated” a 12% increase in transactions in the last quarter compared to the immediately preceding quarter. What they did not take into account was that historically, fourth-quarter sales were 28% higher. This meant that, in reality, volume had decreased by 16%.

What happened in this case? Although the company followed the best practice of measuring the results of its commercial activities, the methodology used was not appropriate. The key to proper measurement lies in comparing the results achieved after the change to what “would have” been obtained if the adjustment had not been executed. The former is easy to measure—it happened—but how do you estimate results that “would have” occurred if they didn’t?

The challenge of any results evaluation lies precisely in estimating what would have happened if the initiative—in this case, a price change—had not been executed. The following are the three steps to conduct a rigorous analysis of results from any commercial activity.

1. Define the periods to compare
The first step is to determine the time periods to compare. The period before the price change is called the “base period,” and the period after is known as the “evaluated period.” These periods should be as close as possible to each other and separated only by the event you want to evaluate—in this case, the price change.

The first mistake is to believe that a simple comparison between these two periods is sufficient. Remember, what is truly needed is to estimate what would have happened if the price change had not been implemented—the baseline scenario.

2. Build the baseline scenario
The results of the base period are adjusted to isolate the effects of variables external to the pricing process, thus obtaining an estimate of what would have happened without the price change. External variables to isolate include seasonality, changes in variable costs, changes in market size, other commercial activities, and changes in the product/customer portfolio.

To isolate the effect of seasonality, differences in the number and type of days, and times of the year, must be considered. To eliminate the effect of changes in variable costs, the same costs should be applied to both periods. The effect of changes in market size is isolated by comparing the company’s market share in each period, assuming the market itself did not change.

To remove the effect of other commercial activities unrelated to the price change, reference should be made to products whose prices were not changed: if these products grew by 10%, then all products must be adjusted by subtracting that 10%, since this variation is due to factors other than the price change.

Finally, to ensure that the two periods are comparable, all products, customers, points of sale, etc., that are not present in both periods should be excluded from the analysis.

3. Compare the evaluated period against the baseline scenario
At the end of step 2, you have a good approximation of what would have happened if the recommendations had not been followed—the baseline scenario. You should now calculate the variation in results—average price, volume, net revenue, gross contribution, gross margin, etc.—by comparing the evaluated period with the baseline scenario.

A price change is considered successful when the gross contribution of the evaluated period is higher than that of the baseline scenario. In some cases, short-term criteria such as increased volume or improved margin may also be included. However, in the medium and long term, the important measure is the growth of gross contribution generated by pricing management.

In summary…
Evaluating the results after a price change is a fundamental part of a mature pricing process. Conducting an incorrect measurement of results can be even more dangerous than performing no analysis at all. To measure the financial results of any commercial initiative, it is essential to clearly define the periods to compare and make the necessary adjustments to eliminate the effect of any variables unrelated to the activity being evaluated.