Best Practices for End-to-End Merchandise Optimization

These blog articles were developed in partnership between Revionics and Retalix to provide retail industry trends and insights. This is Part 1 of a blog series and Part 2 can be found here. Retalix and Revionics will be participants in the upcoming NGA 2013 trade show in Las Vegas. Stop by our booth #500 to discuss how our respective solutions can help your business.

Are Your Social Commerce Strategies Powering the Path to Purchase?

(By Michelle Crames, Vice President of Revionics® Social Commerce)

Smart retailers are turning buzz into business by engaging shoppers where they are by using the new tools of social and mobile to create relevant, meaningful relationships with consumers and to power the path to purchase.

Solutions such as Revionics® Social Commerce targets and motivates a retailer’s most loyal, influential shoppers, converts shoppers into vocal advocates, and uses customers’ social graphs through tailor-made engagement to provide incentives and rewards that surprises and delights the consumer.

In addition, by empowering customers to spread the word on your behalf, it provides a powerful mechanism for grocers and their CPG partners to drive branding and customer engagement, creating new revenue streams for both parties. All this takes place along preferred channels and touch points all the way to online or offline register rings. Click here to see how PacSun has harnessed the power of social and mobile marketing.

Are Your Price Strategies Differentiating You Enough?

(By Aditya Rastogi, Senior Analytical Scientist for Revionics)

Competitive pricing in the grocery industry has become more and more important. Many grocery stores keep some of their prices in check by being aware of their competition’s prices. The recent recession has made the average shopper a lot more value driven and price aware. They are also much more informed and connected with their smart and mobile devices, which provides them with immediate access to prices across various categories and competitors.

Grocers also need to be prepared and have strategies in place to compete against retailers such as Amazon, which have been encroaching on grocery sales. With services like same day delivery and free shipping, online retailers are rapidly becoming more of a competitive threat. These new challenges put additional pressures on the margin and make it imperative for grocers to manage their overall strategy more efficiently while keeping a strong price image. Many grocers leverage Revionics End-to-End Merchandise Optimization Solutions to help them identify items that have a high price visibility among customers and indexing these prices to the competition. In addition to ensuring grocers have the most competitive pricing, organizations also need to offer special services and customer perks that help differentiate them in the industry. For example, services that may be able to help them do this include home delivery and store pickup of online carts, which are becoming more and more popular.

Is Your Target Marketing Precise Enough?

(By Kathy Beck, Senior Director of Product Marketing for Revionics)

Creating and extending loyalty is critical in today’s hypercompetitive market. Shoppers are looking for shopping experiences, which make them feel special and recognize them as a valued customer. Mining loyalty and transaction data in order to identify and extend optimal offers and rewards that recognize shopper and shopper segment preferences at the shopper’s preferred touch point are more likely to incentivize social advocacy, more frequent visits both in-store and online, larger baskets and multiple purchases. Targeted, segmented and personalized offers and incentives can drive loyalty acquisition and extension and ensure that social programs and activities result in rings at the register.

Marketing departments or retail chains can leverage customer data and shopping patterns for creating customer segments. This way they are able maintain close relationships with customers, tailor personalized promotions and target advertisements at carefully selected shopper segments.

Revionics® Social Commerce and Revionics® Promotion Optimization solutions can help you target the right customer, at the right time through the right channel. In addition, learn how PacSun leverages their customer data for optimal customer loyalty and profits by clicking here.

Is EDFP (Every Day Fair Pricing) Part of Your Price Strategy? It should be.

(By Mike Isom, Senior Director of Strategic Pricing and Professional Services for Revionics)

All consumers want to ensure they are receiving optimal value. In an ever-changing retail industry many grocers are finding that the traditional Hi/Lo pricing model is becoming less and less effective in managing the profitability of their business. The new buzz word is EDFP (Every Day Fair Pricing). Finding that balance of right priced items everyday and the items that will efficiently respond to promotion with an increased lift, but not taking the customer out of the market place for weeks with pantry loading, is the foundation of the EDFP model.

Each item has a definite “Consumer Demand Signal” for both everyday and promotional sensitivity to price. Managing the interplay between these elasticities allows identification of the most effective role of each item. Applying strategies for Pricing, Promotion, and Placement against each of these item roles, leads to a more effective value proposition for customers and efficient margin improvement management for the grocer. Advanced Key Value Item analysis (KVI) is the foundation block for building an EDFP environment for pricing within a grocers organization.

Is Your Organization Managing Cost Increases Effectively?

(By Alison Brandt, Associate Vice President of North America Channel Sales for Revionics)

Rising Costs

In the grocery industry, we all know that price increases are inevitable. Whether it is due to rising costs for transportation, materials, or other expenses passing along price increases to customers is a reality. The decision to raise prices may be rather easy; communicating price increases to customers may not go so smoothly. When prices must increase, it is imperative that you communicate how the product remains a good value. Otherwise, why should a customer pay more just to help cover your costs? Take the sting out of the price increase by identifying and communicating its value proposition (e.g., selection, convenience, and service). Never feel that you have to apologize for your price, but make certain that the value offered is never in doubt.

Inflation

Grocers can help combat inflation by increasing the mix of private brand products. The extra margin private brand products provide, usually 400–500 basis points, gives a grocer the incremental margin to absorb some of the cost of inflation if the consumer reacts negatively to increases in unit prices. Some grocers have already begun implementing private brands in their assortment mix as a margin-protection strategy. These tried-and-true levers will help grocers pinch pennies to stave off diminished margins. Many grocers have already made these moves and are unsure of what to do next. They also fear fallout from pushing too far, and may struggle to predict the effects of their actions, which is when a new advanced analytics approach comes into play.

Arm Your Organization with Advanced Analytics

Advanced predictive analytic solutions such as price, promotion, markdown, space and assortment optimization have enabled grocers to run more sophisticated analyses, using massive sets of transactional and third party provided data. The ability to do this has provided grocers with the precise answers to questions once left up to just gut instinct or a feeling. While there will always be an element of art to merchandising, it is the science that underpins new tools now available that have the immediate potential to help merchants make more informed, data-driven decisions based on their shoppers demand signal. Pricing is the lever that will likely get the most attention as inflationary pressures intensify. However, a grocers’ ability to pass along pricing increases will likely vary depending on the company’s market position and value proposition.

(This is the second blog in a two part series that provides retailers with the retail strategies necessary to navigate the global retail industry’s New Normal, which is expecting and preparing for extreme weather worldwide that will substantially impact their costs)

As we pointed out in the first blog of this series, with extreme weather becoming the New Normal for the retail industry it is important that retailers are able to respond and prepare for this type of weather volatility with price, promotion, space allocation and assortment strategies and tactics. This will enable retailers to maximize return on investment, respond to the inflationary impact and address the subsequent changes to consumer demand patterns.

In this blog we will touch on how you can deepen customer loyalty, sharpen your competitive edge and refine your merchandising strategy through the use of predictive data models, key value item and market basket analysis, and what-if simulations. In addition, we will cover key ways to differentiate from the competition using image enhancers as well as the optimal use of demand forecasts in assortment and space decisions when there are product scarcity issues.

STRATEGIC PRICING APPROACHES:  

The options mentioned in the first blog of this series will help move retailers to short-term pricing strategies that can reap long-term rewards. So, what’s the best way to assess whether such strategies will provide anticipated gains in times of flux?

One effective and proven way is to leverage Predictive Data Models, which Revionics’ optimization technology offers. This technology provides weekly updates, or even more frequently for some products, allowing retailers to quickly evaluate the impact of changing competitor prices and frequent costs changes. This empowers them to immediately respond and decide what the best course of action is for price, promotion and markdown recommendations.

Retailers should also conduct more frequent Key Value Item and Market Basket Analysis. These help to establish a baseline from which they can quickly identify and understand changing shopping behaviors, shifting loyalties and consumer sentiments in order to make fact-based modifications to pricing and assortment strategies and tactics.

Retail is an industry where it takes years to build an image and days to destroy one. What-If Simulation (a form of Gaming Strategy) can help retailers to: evaluate various alternatives for pricing strategies prior to implementation; anticipate possible competitor responses and/or pressures; and determine the best timing and increments for price modifications based on future cost changes.

BRAND IMAGE ENHANCERS:

A way that retailers can continue to gain market share, even during difficult times, is to differentiate themselves from the competition through brand image enhancers, including:

• Sympathizing with the customer’s plight. There are different types of messages and value propositions that retailers can develop — such as an entire campaign around letting their customers know that they understand the impact that higher prices are having on them and how they are helping to ease the “price pain” for their customers.
• Being a helpful resource. Image enhancing messaging could include providing helpful tips to consumers such as recipes that highlight substitutable items that are not drought impacted or ways that drought impacted bulk purchases should be stored to maintain quality and freshness.
• Offering real solutions. Establish “Meal Solution Centers,” which offer the opportunity to cross merchandise products in order to mitigate the impact of the severe drought on food supplies and their retail prices.
• Introducing lower priced, private label products. Offering private label products in categories and subcategories affected by the extreme weather ensures that there is always a price-conscious alternative, which helps thwart loss of market share to low-end retailers.
• Thinking bulk. Create alternative pack-sizing and attractive pricing on bulk purchases to support customers who are stockpiling.

DEMAND FORECASTS, ASSORTMENT & SPACE SOLUTIONS:

Revionics Assortment & Space solution’s unique capabilities empowers retailers to leverage science and fact-based decision support, which not only recognizes loyalty, demand patterns and market shifts when making assortment rationalization recommendations, but also simultaneously identifies the appropriate space allocations and adjacencies for products, categories and departments.

Consider these approaches:

• What-if simulation of space allocations can be highly valuable in determining the impact of cost and demand changes on profitability. This modeling can further offer insight into the best space allocation shifts and reductions in order to maximize the return on investment for both inventory and space.
• Demand forecasts used in optimization models — when combined with future drought-related impacts — help predict the impact not only on categories that are directly affected by events, like the drought, but also on those that are indirectly affected. As a result, optimal tradeoffs in space and inventory at the item, category and store level can be understood in advance of actual demand shifts. This reduces the risk of out-of-stock and excess stock conditions.
• Display and location/placement optimization can be used to influence consumers to purchase substitutes for products affected by commodity shortages. In this way, the negative impact of lost sales for products affected by shortages and price spikes can be offset by demand transference to other less impacted, higher margin products.

THE NEW NORMAL:

According to Planalytics, weather volatility of this nature will persist on a global scale, with more intense flooding, heat and drought and larger, more violent storms.

To succeed in today’s New Normal and continue to gain a powerful competitive edge, retailers need to adopt demand-based predictive analytics and apply optimization intelligence to price, promotion, assortment and space decisions.

Leveraging solutions like these will provide retailers with the strategies and tools necessary to combat these present day and future challenges.

(This is the first blog in a two part series that will provide retailers with the retail strategies necessary to navigate the global retail industry’s New Normal, which is expecting and preparing for extreme weather worldwide that will substantially impact their costs)

It was a rough summer for many areas of the world. Extreme weather affected several parts of the world including the U.S., which experienced the worst drought in 50 years, the UK had its wettest season in 100 years and both North and South Korea experienced the worst drought conditions in more than a century.

Many meteorologists and climatologists say it’s only going to get worse. For example, according to experts at Planalytics, a global source of Business Weather Intelligence®, weather volatility of this nature will persist on a global scale, with more intense flooding, heat and drought and larger, more violent storms.

For today’s retailers and shoppers, smaller harvests due to extreme weather conditions mean higher prices. For example, the USDA released a report that showed U.S. consumers could pay up to four percent more for food in 2013, because of the higher commodity prices. Besides increasing costs for manufacturing the thousands of products that contain corn — everything from cereal to cosmetics to soft drinks — higher grain costs have a ripple effect. Articles advising consumers on what to stockpile are now appearing online, and the list of impacted foods is staggering.

To respond and prepare for extreme weather volatility, retailers must be strategic with price, promotion, space allocation and assortment strategies and tactics in order to maximize return on investment, respond to the inflationary impact and address the subsequent changes to consumer demand patterns.

This series will cover practical ways to utilize optimization, predictive analytics and advanced data mining technologies and strategies to rapidly respond to changing shopper and competitor behaviors and navigate these unprecedented challenges with confidence.

Sourcing Considerations:
Retailers may also consider sourcing implications such as:

1. Establishing multiple alternative vendors to keep costs as low as possible while still factoring in implications of higher transportation costs and import duties
2. Shifting purchasing to local suppliers to give retailers a promotional edge by supporting and sustaining the local community
3. Staying ahead of the curve. Now is the time for retailers to lock in contracts with wholesalers for purchases of products that are likely to be impacted by the corn and soybean shortages—such as cereals and oils—so they can store these items in anticipation for stocking them at a later date

Strategic Approaches Part 1
Retailers can get started right away by evaluating their short-term pricing strategies. For example, what cost increases can they pass on? For which categories of products? Which increases can they absorb — at least partially — to stay competitive and to satisfy customers?

These and other questions may be answered by weighing the options. For example:

·      Establish every-day low pricing (EDLP). Create an EDLP strategy for certain items — and advertise them as such — so that they are not subject to price changes when costs shift. This could be part of a far-reaching campaign, of which price is only one component, in order to set a price and brand image that enhances customer loyalty. If establishing hold-down prices, work with the vendor community in order to have trade funds and promotional dollars reallocated to those particular products.

·      Re-think category manager evaluation. Retailers should consider changing the way that category managers are evaluated, so that they are incentivized to work together. This could allow retailers to creatively absorb some cost changes across categories and to permit the impacted items’ prices to stay low while maximizing total store profitability. Approaching this as a whole, versus working in silos, will help enhance market share, margins and image.

The next blog in this series will provide you with actionable pricing strategy tools and how to differentiate yourself and enhance your retail image during these challenging times.

Insight 2011: Empowering Retailers to Climb to New Heights with Price Optimization

By Jason Gatoff, Senior Director of Product Marketing

Last week was our annual Customer Forum – Insight 2011 – and based on the initial input from attendees it was a great success.    It was the first Revionics Customer Forum that I had the opportunity to be a part of as a member of the Revionics team and wanted to share some high level observations and information about the event:

• Attendance was almost twice that of last year’s Customer Forum – including attendees from our 1st customer, Van’s Markets and our most recent customer, Gander Mountain.
• The event was filled with opportunities for the leading retailers to network with their peers and industry though leaders to share experiences and best practices with Life Cycle Price Optimization.
• Attendees were able to hear from four Revionics customers on the main stage – Tractor Supply Co., Pamida, Longo’s and Family Dollar. They presented powerful case studies on their journeys with price optimization – highlighting the financial and operational benefits they have received by leveraging Revionics solutions.
• Revionics domain experts hosted sessions and workshops that provided actionable insight on topics including competitive pricing strategies, leveraging simulation capabilities in this dynamic economic environment, private label strategies, maximizing markdown margin, and improving promotion effectiveness.
• Our partner ecosystem played an active role in the event with sessions led by Planalytics and Willard Bishop and participation in a panel focused on leading edge ways to leverage competitive data by RivalWatch, Comparative Prices International (CPI), and MyWorld.
• Greg Girard, Program Director at IDC who has a deep history in covering the Retail Price Optimization market, kicked off the event with a presentation focused on next generation price optimization capabilities to win in today’s market as well as in the future.

You can read more about Insight 2011 in our post event press release. 

We are already in the process of planning next years’ event and received some great input as to how to make the event even more beneficial for our customers.  Don’t hesitate to let me or your Revionics contact know if you have any questions or want any additional information about Insight 2011 and we look forward to an even better event in 2012.

Next week Revionics will be in the audience, proudly watching our customer and partner, Mark Kelso of Pamida, present at the 2011 Retail Technology Conference. Mark has a great presentation lined up that speaks to Pamida’s strategy and related results of their test-and-control price optimization initiative. Retail technologists should take note, as this is a rare opportunity to hear first-hand how a technology investment drove significant increases in sales and margin dollars in a difficult economy.

Why prioritize a price optimization initiative? Consumer demand patterns and price determination have changed. We can all see it in our own lives, consumer choices, and the value focus. The question is…have you up-leveled your analytical technologies that help category managers and pricing analysts make the best decision on what your prices should be? Do your pricing tactics align and help you meet your category roles and goals?

Do you take elasticity, psychological rules, business practices, pricing image, and merchandising strategies into your price determination?  Are you able to successfully manage the prices related to KVI driver products and all the price points for your private label products and good-better-best relationships?

Your pricing image and price determination is too important to the consumer view, response, and performance to go overlooked. Merchandising granularity has forced retailing to move from national to regional to geographic to demographic and to unique by store. As we develop our localization and one-on-one marketing plans, the right price for the right location becomes more paramount.

The pressures are building … increase sales, maintain margin, grow the basket size, and increase traffic… All at the same time!  The Retail Technology Conference is an excellent opportunity for those attending to network and learn from one another. Revionics will be there to share case studies, and discuss how we can support the development of pricing tactics that align your category roles and definitions so they become a reality. We can quantify bringing multiple goals and business rules into a sales, profit, and margin perspective…thus making the alternatives a fact-based discussion that is driven by your customer’s behaviors.

Interested in attending the RTC? It’s not too late to register! Hopefully we will see you in beautiful Orlando, Florida.

By Jeff Moore, Revionics Vice President of Science and Analytics

Retailers are still reeling from the commodity inflation experienced in 2007 and 2008.  Many attempted to hold prices to compete against the big box stores, as consumers became more value-conscious in the wake of the recession.  The result for many retailers using legacy pricing technology was margin erosion and damaged customer loyalty.

Retailers are facing a new wave of cost increases due to commodity and gas price increases.  Today’s challenge is compounded by a forever-changed, price sensitive consumer.  Harry Balzer, chief industry analyst at NPD and author of Eating Patterns in America, stated:

“It amounts to ‘relative food inflation’.  [Consumers] have so much to spend on food and they will carefully pick-and-choose how to spend it.  Looking for more coupons and discounts, buying more private label foods, eating more leftovers, and generally getting the most bang for the buck.”

When fuel and commodity prices are on the rise, retailers will generally see cost increases across the board.  Some categories, vendors, and products will be hit harder than others depending on exposure to increasing commodity costs.   Retailers with solutions such as Revionics Price Optimization can proactively plan for these increases and automate much of the execution effort, preventing negative impact to consumer loyalty.

How can price optimization help?

• First – The solution is able to maintain margins by identifying less price-sensitive items and recovering margin on these items.  A retailer using our software will do much better than a less sophisticated retailer that simply spreads their price increases across the category or responds product-by-product by boosting prices to recover eroded margins.
• Second – Similarly, Key Value Items (KVI) capabilities within our solution allow a retailer to maintain a sharp competitive focus on the items that dominate customer price perception while remaining non-KVI items can be given greater latitude to respond to margin pressure.
• Third – Because costs change progressively over time (not necessarily all at once), it is important to maintain size/price relationships and brand-to-brand/PLG pricing relationships.  This is another area where Revionics finds ways to recover margin while maintaining overall pricing alignment and consistency.  In comparison, a less sophisticated approach would reactively apply cost increases without aligning pricing relationships over time.  Worse, such an approach may fail to consider the total effect of price movement across related items.
• Finally – Price optimization dynamically reconciles margin goals with customer sensitivity.  As costs increase, price optimization will attempt to recover profit, but the solution may not recover penny-for-penny costs in recognition of the elastic effect of price on consumer demand.  The Revionics solution can also recognize increased customer price sensitivity over time in the face of rising prices and will respond by taking greater margin compression on items and categories where customers show increasing sensitivity – recovering more margin on less price-sensitive items and categories.

These are just a few examples of how retailers with the right arsenal of tools can proactively and effectively manage cost increases while protecting profits.  This blog has focused primarily on Everyday Pricing, but more solutions are available for TPR, Promotions, and Markdowns.  Please comment, or reach out to us at info@revionics.com for more information.

By Richard Huston, Director of Solutions Consulting, Revionics Inc.

Markdowns are sometimes seen as a way to just push out unwanted inventory and clear space for more desirable products.  Here are some questions and thoughts to consider…

Do you have thoughtful merchandising strategies for markdowns?

As part of the product and pricing lifecycle, the markdown strategies are important for capturing revenue at the end of a products life on your selves.  Consider that varying strategies affect price image, how much inventory you will sell, and how much revenue you will get for that inventory.  Whether the event is an aisle reset, product discontinuation, or seasonal clearance, your pricing actions are seen and heard by your customer.

Is your markdown approach to just move out inventory?

Today with price optimization software, one can review the impact of a strategy to move inventory, capture sales, or a blend of both. Many organizations just use markdowns as a way to move out the final inventory, when really one can make better fact based decision regarding different markdown cadences (steps, dates, and prices) and a forecasted capture rate (percent of the original retail value) of the inventory sell through. So, don’t sell yourself short!

Are you taking advantage of localization?

Most organizations just set a national price point to certain types of merchandise as a way to reduce store effort at the shelf level. For some products, this approach could be the best, yet for most products, knowing the inventory position, consumer demand, and each product’s elasticity at that location could yield much stronger performance.  Developing a markdown pricing approach that takes this localization into account can help drive from selling our products short to driving better bottom line.

Are you measuring and managing your results to meet the financial budget?

Many of the markdown mechanisms are used to just meet the budget given and little fact finding to verify the viability, sort of a “this historical performance with some management percentage added in”.  With what-if simulation, setting strategies, bringing in inventory positions, developing markdown specific price elasticities, a markdown event can be planned and more fact based.  As the event is in-flight, the actuals performance can be tracked and the event re-optimized based on localized changing demand patterns.  This yields real-time feedback and responsiveness.  In addition, measuring forecasted to actual performance against the budget, allows the discussion with management and finance to take on a whole new meaning.

In summary, your markdown strategy can be enhanced with markdown price optimization to turn “final clearance of inventory” into a driving revenue capture pricing action.

Learn more about Revionics’ Markdown Optimization solutions.

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 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.

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.