Pricing Strategies and Promotion Best Practices

By Dan Muldowney, Strategic Account Executive

One common characteristic I have found with many retailers that I have worked over the last six years is that category managers spend far too much of their valuable time on price maintenance.   Strategy often takes a backseat to other priorities such as shifting costs and competition.  In many instances where the category managers have pricing analysts to assist, the majority of their time is spent on price oversight and approval as well as negotiating promotional events with vendors and still not strategic.

When you consider the tasks and processes involved in price management, a single vendor cost change may trigger tens to hundreds of price changes within a category. Line pricing rules, size parity, zone pricing, private label shielding and other category rules must be followed in order to maintain role hierarchy and intent for the affected category. Without automation, a simple cost changes prove to be a very time consuming challenge.

Over the last ten years many retailers have looked to life cycle price management and optimization vendors to automate these price management processes.  This technology has been embraced by several leading retailers and help to further cost justification of price optimization. Through use of a price optimization system, these retailers have found that their category managers can shift their focus to work more closely with their vendors. Time spent previously managing tactical tasks can now be dedicated to strategic pricing practices. Additional time saving benefits can be gained when implementing vendor collaboration software.

When I work with a retailer evaluating price optimization, I almost always recommend a “crawl, walk, run” approach when evaluating life cycle price optimization solutions.  Just because the system can optimize pricing does not mean it has to Day One. Start easy with automation.  Once users become more comfortable with the system functions and navigation, then try optimization for few categories and monitor the benefits. When confident of the systems benefits, the pricing team can decide to roll out price optimization across all categories, or go even further and investigate promotional and clearance or markdown optimization.

While the sizzle of an optimization solution is the science, there is a great deal of value provided by automating pricing tasks.  Ask yourself this question the next time you are dealing with price management functions “Is there something that I can be doing to better my category performance and make my pricing activities be more strategic?”

By Jim Sills, Chief Technology Officer, Revionics Inc.

Category Management is undergoing a quiet revolution. Gone are the days when a category manager could trust in intuition and experience alone. The new generation is embracing Retail Science to make better price, promotion, merchandise and assortment decisions. Retail Science applies sophisticated data analysis to help better understand what customers want. Data sources include Point-of-Sale (POS), Transaction Log (TLOG), competitive pricing, panel, syndicated, weather, demographic, and location attributes. Data cleansing, quality assurance tests and outlier analysis are essential for measuring causal relationships. The result is a demand model that accounts for price elasticity, promotional lift, merchandising, seasonality, cannibalization, affinity, space, and assortment. Category managers use this demand model to evaluate and compare scenarios. For example, a supplier may offer a incentive to promote Cheerios. The category manager can evaluate the category profit accounting for vendor incentives, cannibalization, and affinity.  This analysis shows how cannibalization of private label erodes category margin. Even the impact on loyalty customers can be evaluated in terms of basket size and trip frequency by customer segment.

Other examples where Category Managers are leveraging Retail Science include:

Store-Zone Clustering.  Stores in proximity to competitors, population density, household income, median age, and other factors influence customer behavior and sensitivity to price. Store zone clustering identifies the optimal store zoning and can improve profit by 1% of sales for some retailers (higher profits have been realized and this benefit is above and beyond that from price optimization alone). This analysis is based on category-store price elasticity and takes into account demographic data, competitor data, and store attributes. The principal components driving a store into one cluster versus another are evident from this analysis.  For example, zone one may be characterized by highly price sensitive, middle-income, densely populated, customers with a given ethnicity ratio and strong competition from Walmart within 2.5 miles. The strength of each of these factors in driving a store into a given zone is evident from the analysis.

KVI Items. Key Value Items (KVI) have the greatest influence on customer price perception and represent an important segment of a retailer’s business. Frequently, just 10% of a retailer’s items account for 90% or more of customer price perception and have the greatest influence on traffic. These items can come from many different categories and there can be multiple groupings. Examples include highly sensitive items, competitive items, traffic drivers, and basket builders. Retail Science can be applied to identify the top KVI items combining item profit and sales with price elasticity, market-basket analytics, and syndicated data. Understanding which items are the “true KVIs” and positioning them aggressively yields the most return while allowing the freedom to price non-KVI items in line with margin targets.

Pricing. Price elasticity relates the change in units to the change in price as indicated in the table below.

Price Elasticity      Price Change      Unit Change

1.0                          -10%                     +10%

2.0                          -10%                     +20%

0.5                         +10%                        -5%

Retailers can realize more profit and sales by increasing the price on items with low price elasticity and decreasing the price on items with high elasticity. The first step is to identify the category role and strategy. For example, some categories are identified as Convenience, Traffic Drivers, Margin Enhancer, and Turf Protector in this source from AC Nielson:

Consumer-Centric Category Management.  Hoboken: John Wiley & Sons, Inc., 2006

Willard Bishop is especially strong in working with retailers to identify how best to define category roles and map those roles into strategies that can leverage Retail Science. These strategies and the science account for Private Label to National Brand Gaps, Good-Better-Best relationships, Ending Numbers, Price Chance Frequency, Minimum/Maximum Price Change rules, Price-Per-Unit relationships, Margin Targets and Competitive Price Index. Competitive prices can be collected or purchased from Rival Watch.

Promotion. Promoting the wrong product or the wrong offer erodes category profitability. As mentioned earlier, Retail Science can be used to evaluate supplier incentives. It can also be used to recommend the best items to promote and at what offers. During the planning stage a Category Manager can use the Demand Model to evaluate “what if” scenarios. For instance, which is the best item to promote on the front page in a major feature? What is the impact of merchandising the item in an end cap or a display? Is BOGO better than 10 for $10?  In all of these comparisons the Retail Science accounts for supplier funds, cannibalization, and affinity.

Category Managers are now using Retail Science to segment loyalty customers and identify the best one-to-one offers that will drive basket profit and trip frequency. Market Basket Analysis is applied to identify item-level affinity to understand how much a promotion on meat will drive sales in produce.

Retail Science benefits Category Managers best when it is imbedded in tools that support Supplier Collaboration and Ad Planning including pre-press layout with integration to publication tools such as Adobe InDesign or Quark.

Markdown. Simple clearance strategies such as 25%, 50%, and 75% markdown spread across three months leave money on the table. Too often items are marked down when demand is sufficient to clear inventory. Similarly, there are items with large inventory that require deeper or earlier markdown to maximize profit. Retail Science identifies the best markdown amounts and dates. Category managers can specify strategy objectives such as clear inventory or maximize profit. Coherence rules can be applied to simplify signage and shelf tags.

Assortment & Space.  Space and price are inseparable. Suppose that demand is high for a particular item, so high that the retailer often has a whole in the shelf. Is it better to increase the price, or to add another facing?  Retail Science can be used to jointly optimize space and price. In some cases the recommended number of facing is zero—meaning that it is recommended that the item be removed from the assortment. Retail science can also leverage syndicated data from IRI to recommend new items to add to the assortment. At a macro level, categories that need more or less linear space are identified.

Price, Promotion, Markdown, Assortment, and Space impact category profit and sales. A single Product Lifecycle application that integrates all of these applications is extremely useful to Category Managers. For one, a single integrated platform can identify and resolve pricing conflicts. Such as, a 10 for $10 promotion on August 1 would be in conflict with an Everyday price change from $1.19 to $0.89 on July 25. An integrated platform can also provide a single unified forecast which can be compared with the financial plan and actual profit and sales.

At Revionics we specialize in a SaaS-based Product Lifecycle platform that is putting the power of Retail Science into the hands of the next generation of Category Managers.

By Jim Sills, Chief Technology Officer, Revionics Inc.

Are you satisfied with your gross margin and sales per square foot? If not, consider putting the customer first by adopting consumer-centric technologies for pricing.  In “Putting the customer first“, Susan Boyme emphasizes how important it is to “evaluate price elasticity and tailor pricing across specific regions and individual stores.” Revionics is working with Insight-out-of-Chaos to taken customer centricity to the next level by identifying the best items to promote by customer segment. Loyalty data was analyzed in terms of basket profit and trip frequency. While the revenue and profit per basket of loyalty shoppers were found to twice that of non-loyalty shoppers, it was surprising to learn that loyalty shoppers as a whole vary widely in shopping frequency and basket profitability. It was evident from the analysis that there is a large opportunity to increase increase basket profitability and shopper frequency by targeting incentives to specific customer segments. At the same time retailers can build customer loyalty in their VIP shoppers through customer centric offers.

Our research found that basket profitability and trip frequency are largely independent, which fall in contrast to recently reported results from Mark Aguiar and Erik Hurst at NBER. Their research using AC Nielson Home Scan data suggest a “doubling of shopping frequency lowers prices paid for a given good by 7 to 10 percent. Using this elasticity and observed shopping intensity, we can impute the shopper’s opportunity cost of time. Our imputed measure tracks the life-cycle profile of wages rather closely, particularly after middle age.” Their research is presented in “Home Production, Consumption, and Labor supply” at http://www.nber.org/reporter/2009number4/2009no4.pdf.

The authors report finding “elasticity of substitution between time and market goods in home production of roughly 1.8. Food expenditures fall dramatically after the age of 45 while our estimates of actual food intakes increase slightly after middle age. We find that roughly 10 percent of the decline in food expenditures after middle age is attributable to lower prices paid because of an increase in shopping time.

Revionics results were from a high-end retailer, which may explain the discrepancy.

Market basket data was analyzed to identify affinity relationships. The best items by customer segment were identified to drive profitability and trip frequency. In this case, meat and seafood were strong drivers of both basket profit and frequency. Cheese, coffer, and tea were good candidates for basket builders and prepared foods helped drive trip frequency.

The analysis requires an understanding of cannibalization as well as price elasticity and affinity. When these relationships are understood, retailers can make better decisions about what item to promote at what price to specific customer segments. For more information, please email Revionics at info@revionics.com.

By Erik Osborn, Business Consultant at Revionics

Price optimization works best when the retailer is confident in their pricing strategy for their business and the product categories they carry.  For this reason, we chose to blog about the importance of defining category role when approaching any pricing initiative – whether your initiative is around everyday price optimization, promotion planning, and markdown optimization.

The industry standard model for Category Management is an 8 step process. The 8 steps are:

1.    Define the Category (i.e. what products are included/excluded).
2.    Define the role of the category within the retailer.
3.    Assess the current performance.
4.    Set objectives and targets for the category.
5.    Devise an overall Strategy.
6.    Devise specific tactics.
7.    Implementation.
8.    The eighth step is one of review which takes us back to step 1.

First, we will focus on the importance of step 2 in building an optimal pricing strategy.  Defining the role of the category within the retailer is really done by defining what is important to your customers, and knowing what is important to your customers is critical in defining your pricing strategy.  There are ways to get to this information in your historical sales data by measuring key metrics to truly define what is important to your customers.

Once you’ve defined your category roles you can then set a pricing strategy for each role.  That way you are pricing all of the items that are most important to your customer according to desired outcome.  Your customers will be happy if the items important to them are priced correctly and reward you by coming back.  Some things to consider would be the competitive position of each of those roles, elasticity of the products in each role, and goals for each category role.

In addition to the Revionics Life Cycle Pricing Solutions, our Business Consultants are available to help our customers identify and shape the roles of their categories.  Category Role Definition is one of our more popular services, as retailers fight to keep share of wallet while protecting margins.  Category Role Definition includes determining the proper category role and subsequent strategy based on elasticity, demand forecasting, and promotional lift from your historical sales data.  Revionics can then directly implement those strategies within our Price Optimization solution by configuring the system to reflect the retailer’s strategy.  For more information please visit www.revionics.com or email us at info@revionics.com.

A Group Contribution from the Revionics Consulting Team

If any of us had a crystal ball, we would most likely be enjoying a relaxing life somewhere, as we would have foreseen the recent changes in our economy and been better prepared to weather the storm. But since most of us are not privileged to that mystical tool, let’s talk about a few things we should all have on our immediate radar and be planning for as we look to the coming months.

1. Stabilization of the economy: Even though home prices are still slumping, and the jobs picture is only seeing slight glimmers of hope on the horizon, it appears that the worst recession in 70 years is behind us. Retailers that have been able to manage inventory and pricing through this turbulent time are well positioned for the future. As the economy begins to gain momentum over the coming months it will be important for retailers to continue focusing on KEY elements of their business that have defined them to their customers. Things like value proposition, loyalty, service, and value-added benefits need to be safeguarded and used as spring boards into the future. The ability to engage in predictive analytics or Future Planning will be paramount as we exit this economy. Being able to create “what if” scenarios in a real-time environment, such as is possible with Revionics Planning will allow retailers to keep ahead of the curve.

2. Shifts in consumer behavior: According to IRI’s recent FMI Economic Trend analysis for 2010 – “Consumers began embracing a range of money-saving strategies as means to survival earlier in the recession. They have quickly become engrained, and all indications are that consumers will continue with these tactics for the foreseeable future.” Consumers have become very value oriented. It is important to remember that value is an equation, not just a price point for the majority of customers.

3. New directions for private label: More consumers across ALL income and age segments are trying private label and recognize the total value of these brands vs. name brands. In the food segment alone, retailers have enormous upside potential in private label initiatives that encourage trial and repeat purchases across food and nonfood categories.

One of the key components to future success is a resetting of their current paradigm to a mentality of leadership rather than that of a follower. This takes a forward-looking approach, using predictive analytics created from and supported by their individual consumer demand indicators. Retailers must continue to evaluate their offerings through the filter of value proposition to their customers. Brand consolidation, based on eliminating confusion within a segment, will allow for better placement of private label offerings for continued penetration and profitability. Product planning, including an understanding of the role and interaction of each product, is critical to achieving maximum success at the enterprise level. Penetration of private label offerings, as well as maximizing the national brand potential, are both tied to this very important effort. Merchandising and advertising tactics that help build the brand in-store will be needed to maximize success in the future.

4. Potential shifts in store cluster dynamics: With virtually all demographic and socioeconomic lines impacted by the economy, what held true for retail store clustering a few years ago might not be true today. Stores that have traditionally catered to an infinite flow of disposable income are today seeing higher redemption of coupons and greater dilution from ad shopping than ever before. Specialty departments are suffering or are being closed in many of these stores. Revionics Consulting group can assist retailers in determining if their current zone structure is relevant with the recent changes. We can assist in determining if current stores are in the correct clusters and if the appropriate number of zones are being used to maximize profitability.

5. A balanced approach to promotions: With the consumer focus on value, and manufacturer’s willingness to invest in promotions rather than cost reduction, we have just gone through one of the most promotionally intensive time frames in recent retail history. While price and promotion have become a bigger differentiator than ever before, a merchant’s ability to control the MIX of prices through optimization and promotional pricing tools will help keep margins on target. The ability to evaluate the effectiveness of promotional offers and their impact on lift, affinity, cannibalization, and contribution to profitability at both the category and enterprise levels is crucial. Strategic pricing, both everyday and promotional, supported by technology continues to be recognized as an enormous opportunity for retailers. An integrated approach to all aspects of the pricing lifecycle, such as is offered by Revionics, will be critical in making the most of the pivotal time ahead.

Even though the immediate future still appears rocky, there does seem to be a brighter future just around the corner. Revionics stands ready to assist retailers in navigating these emerging waters with its full suite of lifecycle pricing tools and consulting resources.

By: Jim Sills,  Ph.D., CTO, Revionics, Inc.

Revionics’ mission is to increase retailer profitability by enabling better management of price, promotion, markdown, inventory, assortment & space. Revionics is unique in that we offer an integrated solution that shares a common demand forecast across all of these functions. In this article, I answer the question, “Why is an integrated solution better than individual point solutions?”

First, let’s cover some basics. A demand forecast is more accurate if it accounts for all price, promotion, and markdown activities. For example, demand will increase during promotions. In addition, the demand forecast must account for seasonality including holiday lift, day of month, and special events. Finally, the demand forecast must reflect cannibalization and affinity. For example, we’ve seen promotions on Campbell’s Tomato soup cannibalize Chicken Noodle and drag along sales of Kraft American Cheese used to make toasted cheese sandwiches.

Second, let’s not confuse a demand forecast with a sales forecast. A demand forecast estimates how much you might sell, while a sales forecast estimates how much you will sell. Why is there a difference? In short:  assortment , space and inventory. Let’s take an example:  Suppose that the demand forecast for Tide Detergent is 30 units in a given store for a given week. However, the assortment planogram allows just one facing with a shelf capacity of 7 units. The workforce plan calls for the shelf to be replenished every three days. At most you can sell only 21 units during a given week. The sales forecast must be lower than the demand forecast.

Let’s consider just pricing for a moment. Suppose we are modeling and optimizing prices in a category. The prices will be implemented in the store in six weeks. Optimization recommends decreasing the price on Hefty Recycling Bags. However, the assortment plan shows that these bags will be discontinued in 8 weeks. An integrated solution won’t waste the price change on an item that is being discontinued—a point solution would.

When it comes to assortment and space planning, integration with price, promotion, and markdown is easy to justify. Any item that is discontinued from the assortment should automatically go on markdown. Assortment and space optimization depends on price and promotion. For example, an item may be eliminated from the assortment if its price is high, but at a lower price, it might make the assortment cut. An item may have enough facing for everyday pricing, but what if the item is promoted frequently. Then the shelf space should be supplemented by either an end cap or a display. Or, suppose an item does not make the assortment cut, until one considers the lucrative vendor incentives received for promoting that item.

There is also the argument that if the demand is so high that I keep running out, I may either want to increase price, or increase the number of facing. Which is the best choice? Only an integrated solution can provide the answer.

There are several examples where Inventory optimization depends on price and promotion. Everyone knows that promotions can have a huge impact demand and consequently on order quantity. To a lesser extent, the same is true of base price changes. But does everyone understand how a promotion might cannibalize sales. For example,  an general merchandise retailer might have a location with only 25 packets of Fruit of the Loom t-shirts on the shelves.  Normally this would not be enough, but due to a promotion on Hanes t-shirts, the cannibalization of Fruit of the Loom means I have more than enough.

Another consideration is avoiding vendor disconnects. For example, suppose a vendor offers an incentive and the retailer runs a promotion. The vendor may have planned for 100 cases but the retailer’s demand forecast is 200.  If the vendor doesn’t have the supply to meet demand, the retailer suffers lost sales. This can be avoided by sharing the demand forecast with the supplier thru the Revionics Collaborate, our Supplier Portal.  Here, the retailer can share the promotion plan and the forecast with their trading partners, and the supplier can submit deals that are better tailored to meet demand expectations.

An integrated solution solves many problems for both the retailer and the vendor. While this all may seem too advanced, consider the pace of change in the world today. Revionics is actively driving change and delivering tomorrow’s solutions today.

By:  Susan Boyme, Vice President of Marketing, Revionics, Inc.

As Revionics announces the release of Collaborate, our new supplier portal for retailers, it causes me to reflect on  the web-based trading exchanges, marketplaces, and other “one-to-many” and “many-to-many” models I have bumped into over the past 15 years.  Regardless of model, the most successful initiatives have one thing in common – the party sponsoring the initiative must be the buyer.  Supplier-driven models are well intentioned, but don’t get traction.

The promise is consistent – improve the supply chain by creating an automated, seamless way for buyers to communicate with their suppliers.  Industry-sponsored initiatives stall is when standards are created or enforced, business models are debated, and when the key buyers don’t lead the charge.

At Revionics, our blood bleeds retail, so our perspective is that exclusively of the retailer.  Collaborate, therefore, reflects a rather retailer-centric view of the world.  Within our community of over 100 retail clients, we consistently heard:  Help me create efficiencies by improving the way I do business with MY suppliers.  Help me automate the collection of data from my smallest, least efficient suppliers.  Help me collect my deal information and integrate it into my promotions planning platform.  Help me to know if a deal is good or not before I ink it.  Help me to share information with my supplier community in a way that is controlled, but helpful to my business…

Collaborate’s strength is in its blend of simplicity and sophistication.  For the retailers ready for on-demand promotional modeling of deal monies offered by suppliers, Collaborate can act as a hub of negotiations and deal management.  On the other hand, if a retailer simply needs a central repository for hosting data for their smaller, less sophisticated suppliers, Collaborate can do this too.  Collaborate provides a comprehensive suite of capabilities that are adaptive to the needs of each individual retailer.

Revionics has proven scalability for web based applications – we host and manage pricing for over 20,000 stores each week.  Collaborate leverages the same SaaS platform and creates a private, portal experience for each retailer.   With our deep expertise in systems integration, we have the ability to receive a variety of inbound data types (XML, EDI), and pass information to existing retail environments for the least possible disruption.

Yes, I’ve bumped into many initiatives with the intent of solving supply chain initiatives in the past.  In the end, the buyer wins with Revionics Collaborate.  Collaborate gives the retailer the power to insist on better standards from all suppliers, regardless of size.  I encourage retailers out there who are struggling with disparate ways of managing inbound data from their suppliers to investigate Collaborate.  For more information, visit www.revionics.com/raps-collaborate, or email us at info@revionics.com.

By: Jim Sills, Ph.D.,  CTO,  Revionics, Inc

Ideas are like tomatoes. They start out small and green, but if the circumstances are right, they grow and ripen until they bear fruit. That is definitely the case for Revionics’ idea to provide retailers with One Integrated Forecast.

The idea was born years ago. At the time retailers had multiple contradictory forecasts: one forecast was used for financial planning; another for replenishment; another for workforce management. There was a store forecast for all categories and a category forecast for all stores—but the two did not match at the enterprise level. There were forecasts at daily, weekly, monthly, quarterly, and annual levels—when rolled up these didn’t match either. None of the various forecasts provided the accuracy necessary to make good business decisions. Retailers could not accurately or consistently predict their business. If a business is not predictable, then how can it be managed?

The idea was to provide retailers One Integrated Forecast that is accurate and meets all planning requirements. Let’s break this down into three components:

One. Replace the set of disparate forecasts with one forecast.

Integrated. Include all planned price and promotion activities. This includes merchandising activities such as displays and signage; and advertising such as circulars and flyers. It also must account for direct marketing such as email and offers to loyalty card customers.

Accurate. There are three measures of accuracy:
1.    Bias. The aggregate across all items and stores is unbiased.
2.    MAPE. The mean average percent error is small.
3.    Confidence. The accuracy of the confidence interval is high.

The factors that can influence the forecast accuracy include:
1.    Seasonality. Monthly, quarterly, bi-annual, and annual cycles.
2.    Holidays. Flexible calendar of holidays and events with pre- and post- holiday lifts. Ability to define custom events.
3.    Trends. Year-over-year trends either up or down in sales.
4.    Cannibalization. Substitution effect where a promotion on one item takes sales from another similar item.
5.    Affinity. Drag along sales where a promotion on one items drives sales of another item.
6.    Weather. Factor in the impact of weather.

Revionics offers One Integrated Forecast with unparalleled accuracy because it accounts for all the factors listed above.

We recently were working with a grocery retailer who wanted to reduce shrink in his produce section. He frequently promoted tomatoes and believed that with a more accurate forecast he could avoid ordering too much—leading to higher shrink, and he could avoid ordering too little—leading to stock outs. He knew that when he promoted red roma tomatoes it reduced the demand for hot house tomatoes, but he couldn’t quantify the amount until he used Revionics Promotions Planning module. He was able to forecast both the red roma and the hot house sales during the promotion with more accuracy. The result—no stock outs and less shrink. Revionics Forecast, delivering One Integrated Forecast to retail, is an idea that is ripe on the vine and ready to harvest.

By: Ken Cline,  Application Consultant,  Revionics, Inc

I was recently reading Supermarket News, and came across this article that spoke to the state of the state within the grocery vertical. It speaks well to what it takes to succeed in today’s environment.
Food retailers are turning to analytical systems that can help them survive the harsh economy, according to SN’s latest technology survey.

Faced with the worst economic downturn in decades, U.S. food retailers are using technology to gain a better understanding of their position in the marketplace — and to optimize that position in respect to inventory, pricing, labor and a host of other business-critical elements.

Profit analysis is an application many worried retailers are turning to these days. While it ranked high on the list of priority items for 2008 at 25.5%, its popularity jumped to 36.2% on the 2009 list. Closely aligned with profit analysis is the expanding area of price and promotion planning and optimization.

Pricing has been an especially complex issue in the past year as retailers have grappled with rising commodity prices, as well as the need to lower retail prices to help out struggling consumers. Survey respondents consequently were prone to select promotion planning (30.9%) and price management (29.8%) as high-priority applications for 2009. Likewise, among applications that will be tested or launched in 2009, trade promotion management (16%) and price optimization (13.8%) ranked second and third.

Price optimization applications give retailers a forecast of what consumers are likely to do — and how profit margins will be impacted — when prices are raised, lowered or left the same. Without this scientific approach to pricing, retailers “are not going to find margin improvement,” said Scott Langdoc, chief strategist, Retail Centric, South San Francisco, Calif.

By: Jeff Smith,  Founder & EVP Business Development,  Revionics, Inc.

In retail, there is a key piece of information that contains a lot of power, that piece of information is the price sensitivity of a given item in a given store. Obtaining that piece of information is a very difficult thing to do.  If it weren’t for seasonal effects, holidays, promotions, out of stock conditions, low unit movement and a variety of other challenges, it actually would not be too difficult to determine.  After all, it is simply a prediction of how much the unit sales will change given a change in price.

With this information in hand, there are a variety of tasks that can be done more efficiently. One example is the identification of key value items, or KVI’s.   For retailers without optimization technology, the way this is accomplished today is by looking for the items that have the highest turn.  Unfortunately, this method shows items that are hot sellers, but these items may also be insensitive to price changes.  When retailers are able to obtain actual price sensitivity by leveraging optimization science, it is very interesting to review the sensitivity of these high moving items; there are always items in that list that are not price sensitive.  What does that tell you?  Often there are low margins on high moving items that could easily withstand a price increase without impacting consumer demand.   Retailers could be making up valuable profit dollars on these items.

Another key insight that can be gained from retail data is more accurate forecasting of revenue, profit and inventory requirements when making price changes or promoting items.  This accurate forecast is used when modeling and planning merchandising strategies for a category, department or banner.  Retailers can maximize margin dollars by charging a little more for items whose unit movement is not impacted much by the price increase, and reducing the price on items where the unit movement will increase more in proportion to the price decrease.

Information is power, and a good price optimization environment empowers the retailers with both recommendation and reporting that allows them to improve profits, price image, and customer satisfaction.  Revionics solution delivers both advanced price optimization and price strategy services to help retailers accomplish their goals.  For more information, please visit www.revionics.com, or email us at info@revionics.com.