Pricing Strategies and Promotion Best Practices

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: 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.

By: Christie Frazier-Coleman, VP Consulting, Revionics, Inc.

Frank Badillo a Senior Economist for Retail Forward in his November 6, 2009 Washington Post article stated:

“Don’t expect shoppers to abandon their hard-earned lessons in frugality even if the economy starts picking up.  Households remain focused on shopping for needs, and this kind of cautious shopping behavior will restrain sales improvements.”

So as 2010 begins what are the best practices in pricing that remain constant in their ability to generate solid returns?

1. Track trends in customer and competitive behavior and react to trends not single events.

2. Engaging in forward planning that utilizes forecasting tools for accurate assessment of demand shifts over time.

3. Set goals at the highest and lowest levels.  (Every member of the organization should know and understand their part.)

4. Evaluate opportunities with store clustering, customer segmenting, and predictable competitive behaviors.

5. Assign a role and goal for base, promotional, TPR, and even markdown prices and margins.  A plan for total margin mix, sales, and units needs to be known not an accident.

6. Constantly measure the strategies for execution excellence and constantly measure goals against well executed strategies.

7. Learn to understand the principles of elasticity, cannibalization, affinities, and optimization.

8. Utilize private label as a way to maintain margin speed and provide value.  Set proper gaps based on price points that are palatable to your customer.

9. Choose the right competitors to measure against.  Who do your customers shop?  Choose the right items and frequency for competitor price shops.

10. Manage fewer Key Value Items-assess which are the most likely will cause defection if not priced right.

These are just a few that our retail partners are using.  If any of you have best practices  you want to share  please do so.

By: Christie Frazier-Coleman, VP Consulting, Revionics, Inc

In my retail career, I have had the opportunity to implement many types of software.  Each and every selection and installation had the intent of assisting the business to improve processes, implement new strategies, and increase efficiencies.  Companies today are looking for tools to squeeze extra margins, reduce costs, and help make better decisions.  How do the great companies succeed in capturing the changes and efficiencies needed from those investments?

The Pricing and Project team at Revionics combined their expertise to offer some thoughts on what has worked well in their experiences.  These ideas come from the great partnerships we have had the opportunity to build over the years.   We thought it would be beneficial to put all of these best practices in one good list and we hope you agree.  I am sure there are plenty more and we would welcome any comments or suggestions that we can publish next quarter.

So where are you on the successful project scale?  Measure yourself.  Pat yourself on the back if you are doing them all!

1. Begin with the end in mind.  Implementing software is not a goal. Using software to solve a problem or achieve a measurable improvement is a goal.  Ask yourself and the team what is it you want to accomplish?  What will that measurement look like in terms of success? Decisions become very simple.   All decisions must assure that the goal and measurement can be accomplished above all else.  For example:

Question: Why do I need to capture a separate sales type in my data to indicate base sales versus promotional sales?

Answer: In order to measure the effectiveness of my promotional dollars those designations are critical.

2. Protect your data integrity fiercely from inventory purchase to point-of-sale purchase. Benefitting from technology enhancements requires good data.  Clients with clean data complete projects on time and produce results much quicker in every case.  Above all else, your data is the lifeline to understanding your customer, measuring success, capturing efficiencies effectively, and setting strategies for the future.  Not being able to trust your data breeds “by the gut” decisions.

3. Executive support is a must from both sides. Executives should make impromptu visits to project meetings.  They need to ask the tough questions and expect executive updates and feedback on successes and barriers from project teams both internal and external.  They must be able to hear the truth and help solve problems when needed.

4. Do not put old practices into new tools. Test those paradigms with a review.  Perform a business analysis to look at old processes and make improvements.  The reviewer should be skilled at asking the right questions to identify the root of the problem or opportunity before a project begins.

5. Set realistic but aggressive goals for completion in each stage. Projects will always slip.  What are the critical junctures in a project?  Push to do it right but meet deadlines.  Teams need to understand that when you agree to a date it means something.  Hold everyone accountable and keep the project moving forward.  Lack of momentum will de-motivate the team.

6. If a project is slipping expose the cause. The longer it drags on the less effective the result will be.  The team will be de-motivated and begin to compromise.  User embracement and excitement will suffer.  Demand complete honesty and professionalism from your project managers.  You need level-headed and forthright project management on both sides.

7. Implement and rollout in stages. Successful projects are implemented in stages with clear objectives. Expectations and measurements should be set for each stage.  Risks are then kept to a minimum and lessons learned along the way are captured and improvements made.

8. Balance project demand with resource capacity in order to maintain momentum. Work backward into the timeline to make sure it is realistic in time and resources.  Successful projects are completed in stages without stressing resources.

9. Expect the unexpected. As you move through implementations, you will always discover multiple opportunities for improvement.  Each new request needs to be evaluated against the goals, timelines, and resources.  Make sure those new requests are placed into a “parking lot” for a future stage.  Manage the scope!

10. There will always be a function or a feature that is not yet available. A good partner will work to address your needs in the future and ask for feedback in order to maintain a forward-thinking roadmap for development.

11. Train, Train, and Train. Your teams need as much training as possible.  Identify each role that will be impacted by the project and get them trained on the appropriate skills.  Schedule one-on-one sessions.  Do not let a user return to their desk confused and flustered by what they cannot recall or understand.  People learn at different paces and some are afraid to raise their hand.  Make sure that materials are provided and measure their proficiency and progress.

12. Count on change management challenges. Within every organization there are individuals who need more convincing that they can and need to learn new ways of doing things.  There are a few key steps to keeping resistance from stalling or compromising a project.  Identify and include “strugglers” in relevant decisions, conduct extra training, talk about the benefits of the new process,  and, as a last resort, make a change.

13. Learn and practice the art of communication up and down. Encourage open dialogue and honesty among the project team, the departments that will be affected, and partner company.  All of the ideas stated above are a function of listening and learning.

14. Celebrate each stage with the team. They deserve the recognition.

By: Christie Frazier-Coleman,  VP Strategic Pricing & Consulting,  Revionics, Inc

Are you brand blocking your private label or doing the compare and save strategy?  With price optimization we tend to encourage a frequent review of base pricing, and in particular, a heavy scrutiny on private label versus national brand price relationships.

How does this impact merchandising decisions?   For example, in the past, best practices dictated that private label should be merchandised immediately to the right of the leading national brand. This is typically done during the category review process on a bi-annual or annual basis.   Some retailers are now recommending that a private label should follow the national brand with the lowest base retail to set a price gap. Does this force the retailer to change his schematic as often as he changes those relationships  or are the old merchandising rules obsolete?

Are the old merchandising rules becoming obsolete?    For example, does it not make better sense to link the private label to multiple national brands?  Items such as private label chocolate chips to both Hershey’s and Nestles’ or private label batteries to Energizer and Duracell are examples of the modification to the rule retailers and merchants need to answer for pricing considerations as well as merchandising strategies.  In this case, the decision needs to be made to select ‘the’ most relevant item to merchandise against.   I think the merchant needs to determine which brand is the most recognizable to that customer base for pricing relationships if you are still using the “to the right” positioning of private label.

Some of the most successful retailers in private label have not merchandised to “the right” for years. They have BUILT their private label into its own BRAND and can have it stand alone in many instances. (Lady Lee – Presidents choice – etc).  Some other giants like Target are still using the compare and save approach.  Which is the best strategy for the future?

I’m interested in receiving your comments.  What do you see with retail in private label pricing relationships and merchandising?  Any feedback as to best practices you are seeing?  Is it an all or nothing strategy?  Are there cutting edge strategies you are seeing or tests you are doing yourself that you can share?