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.

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.

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: Todd P. Michaud,   President & CEO,  Revionics, Inc.

I saw a very good article carried in Supermarket News yesterday written by Michael Garry.    The article was called “Bouncing Back” and it summarized anticipated retailer spending forecasts on information technology.   Read the article here.   I was pleased to see the increased acceptance that Software-as-a-Service has gained given its advantages for retailers.   I was also very enthusiastic about the increasing importance that retailers are placing on Price Optimization, Promotion Planning, Trade Promotion Management, and Computer Based Ordering, all things that are core to the Revionics solution portfolio.   With the National Grocers Association show occurring this week, the article was very timely.

If you happen to be attending the National Grocers Association Show in Las Vegas this week, I want to personally invite you to attend a presentation that I will be doing with Luigi Mucciacciaro, Director of Store Operations for D’Agostino Supermarkets on their experiences with Price Optimization.   The educational session is entitled, “Price Optimization for Improved Profits”  and it will take place on Thursday, February 11th at 9:15am-10:15am in the Versailles Ballroom 3 & 4 at the Paris Hotel.  This educational session will cover how pricing optimization software can be used by grocers to drive sales and profits all while tuning pricing to satisfy consumers.

I want to also mention that Revionics will also be exhibiting on the NGA Show Floor. Be sure to stop by the Revionics booth (#703) for additional information on our product services in addition to meeting the Revionics team.

If you have any questions, please feel free to contact me at tmichaud@revionics.com.  I look forward to seeing you in Las Vegas for the National Grocers Association Supermarket Synergy 2010 Show.

By: Jeff Smith, EVP and Founder, Revionics, Inc

For some time,  Revionics University has been producing highly attended web seminars pertinent to the retail industry. These seminars have covered a broad range of topics regarding general trends as well as best practices in relation to pricing. With Revionics University expanding, courses targeted directly towards Revionics customers are now available.

Retailers often purchase software or a pricing service and do not fully utilize the value and potential from that purchase, utilizing only a small percentage of the capabilities. We at Revionics want to make sure that our customers are knowledgeable and up-to-date on the capabilities of the RAPS pricing software and price strategy services.  The best way to do this, we concluded, is through training that is easy to access and available to all. The Revionics University Customer Training courses are the latest edition to Revionics University and consist of several courses covering the topics of RAPS Everyday Pricing, RAPS Promotions, RAPS Markdown, and RAPS Insight Reporting. Advanced courses will be available in the near future for more intensive core functionality courses.  The expanded course offering will include topics such as advanced scenario planning, competitive response, promotion effectiveness, private label management, and more.

The Revionics University Customer Training courses should be leveraged within an organization as an aid in the building of expertise in using the RAPS modules. These training courses are recommended for new employees to become familiar in using the RAPS pricing software as well as seasoned users looking to become accustomed to the more sophisticated features offered. The Revionics Customer Training courses will be offered on Friday mornings, and recorded to make it easier for individuals to watch on-demand. Core introductory courses will be offered on a monthly basis.

Revionics University will be hosting a special course, “Understanding Elasticity and Product Demand” on Friday, November 6^th at 9:00am. This course is recommended for individuals who are interested in learning more about the science behind price optimization. Click here to register.

As I stated above, Revionics University will be adding additional courses in the near future. Your recommendations and suggestions on potential course ideas are always welcome. Please contact me for additional information on the Revionics Customer Training sessions at jsmith@revionics.com.

By: Jeff Smith, Founder and EVP, Revionics, Inc

Historically, the US has led the adoption of advanced pricing software.  With retail price optimization being invented in the United States – particularly in Sacramento as a matter of fact, it makes sense US retailers are more comfortable with the technology since they have been exposed to it much longer.  Many of their domestic retail peers have implemented some type of price optimization solution and are reaping the significant rewards of doing so. In other words, optimization is a known and proven commodity in the United States.

Retailers outside of the US seem to have caught the optimization bug. Interest and inquiries are consistently gaining at a rapid pace.  Historically, these international retailers have tended to be more progressive, adopting new technologies sooner than their US counterparts. Adoption should be quick now that there is interest.   Through conversations with many of these retailers over recent months, I have discovered that they face similar challenges, but information on advanced pricing solutions is not readily available for them.  On a recent visit to a retailer in the Asia-Pacific region, it was not surprising to find us having the same discussions as with retailers in the United States; they are facing the same challenges and are thirsty for information on how to solve retail pricing problems.

International retailers have a great advantage compared to the early adopters many years ago in the US. They will be able to leverage the fact that price optimization has matured, with second generation price optimization systems now on the market as well as many installations completed and live for a number of years. International retailers should plan for a healthy return on investment through the use of price optimization systems, in both profit and productivity savings.  If you’d like more information, download my white paper to learn more about functionality to look for in second generation optimization solutions.

By: Todd P. Michaud, President and CEO,  Revionics, Inc.

As we look at the retail market, we see most retailers plagued with either inadequate Retail Demand Intelligence (RDI) and Forecasting tools or on the contrary, some retailers have too many disparate systems that contradict each other.   This is even true for those retailers who have selected comprehensive solution portfolios from the largest of software vendors since so many software vendors have merely intellectual property that they have acquired through poorly architected interfaces.

The market is ready for an open, integrated forecasting solution provider that has the expertise, willingness and I/P to synthesize these disparate systems.     As you probably are aware, today Revionics offers Full Life Cycle Price Optimization and we are in the process of readying our the release our Inventory Replenishment Optimization solution prior to the end of the year.  All of these capabilities will be based on our fully integrated forecasting and RDI platform.

Despite the breadth and depth that we expect of our own solution portfolio, we know that all retailers will have other solutions already installed that we will need to integrate with.   In essence, our forecasting platform needs to become the glue that unifies the disparate solutions together.    We have architected our Integrated Forecasting capabilities in this fashion.    In this environment, there are many demand influencing factors that we must account for such as…

•             The influence of Price, Promotion and Markdown
•             The influence of Introductions and Discontinuation
•             The influence of Supply or Demand Shock (Product Availability)
•             The influence of Seasonality and Holidays
•             The influence of Cross Effects (Affinity, Cannibalization, & Pantry Loading)
•             The influence of Space
•             The influence of Weather

Candidly, many of the solution providers in the retail segment simply can’t effectively do these things.   They can’t integrate with upstream or downstream solutions by other software providers.   Consequently, we have decided to differentiate Revionics on the basis of open scientific and analytical capabilities.    We do not believe that retailers will want to settle for large, monolithic software portfolios if it is at the expense of best of breed and competitive advantage functionality.

By: Todd P. Michaud, President and CEO, Revionics, Inc

Last week, Federal Reserve Bank Chairman Ben Bernanki announced that the US is on the “cusp of recovery.”   I couldn’t agree more.   As you can see from my previous posting, I have suspected a turn in the economy for the past few months, and have urged retailers to start focusing on the recovery.   As a provider of pricing software, Revionics has a front-row seat to how leading companies adjust for different economic conditions.   Despite the obvious economic improvements that we are starting to see, it is clear that consumers generally remain very price sensitive.

Responding to the more frugal shoppers, a price war has begun in the supermarket industry.   Safeway announced the intent to lower their prices by 25%.    And at Revionics, many of our clients are also making significant price investments.    The goal for these retailers is to drive traffic and market share.    It is hoped that absolute margin dollars will increase by selling a lot more goods to price sensitive consumers.   Many retailers are reflecting on some key questions;  How do I remain competitive while maintaining my margins?  How do I reinvent my price image to better attract a value-centric shopper?   If I lower my prices, will I see a corresponding increase in sales?

So, with the positive signs in the economy, this has been a very good time for companies like Revionics that offer consumer demand centric pricing and promotion systems.    Retailers are looking for more sophisticated ways to make certain that their pricing and promotions are calibrated to the needs of their consumers.    Old strategies, old systems, and old techniques are no longer adequate for the pricing challenges ahead in this very unique economic environment.