Pricing Strategies and Promotion Best Practices

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.