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.

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?”

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.

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.

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.

For the past 2 years, retailers’ private brands have been the topic of much discussion. In the failing economic conditions we are experiencing, many consumers look to private brands as a way to stretch their budget. Retailers have reacted by continuing to introduce additional offerings and manage favorable pricing positions that have also been one of very few bright spots in a mostly bleak sales and profit battle field.

In Europe, private brands have long held a significant position in both sales as well as overall percent of assortment. In the US marketplace, private label has been viewed as a lesser quality or subpar brand leading to a very limited penetration for many if not most retailers. But in a recent private label report, IRI has made the following observation:

1. In the shopper survey, consumers told us that purchasing a private label is a brand-driven decision that involves many factors including their own emotional connection to the retailer itself.
2. In looking at shopper attitudes of private label quality, over 78% of both lower-income and higher- income consumers believe that private label products are typically of excellent quality.
3. Four-of-five shoppers are now “sold” on private label quality indicating that product marketing during the current recession is successfully expanding the positive reputation and reach of these products.

‘IRI Private Label report

As private brands continue to grow in acceptance by the consumer as a viable substitute or replacement to the national brand, retailers will need to continue to drive private label to the fore front of their assortment and marketing plans to keep pace. Successful retailers have begun brand building on their private label offerings insuring the customer’s confidence for the banner carries over to the brand.

Now more that ever retailers are in need of insuring that they have a clearly defined strategy regarding  the relationship pricing between the National Brand and private label item. Price optimization becomes a critical component in the execution of this pricing strategy. By capitalizing on the consumer demand signals of an item, the optimum price and profit potential can be realized from this ever growing segment of the assortment.

Private Label items have gained a significant foot hold in today’s retail arena, and will continue to grow in impact and importance well beyond the recovery of this economy.   For more information, watch our webinar, “Good, Better, Best” by clicking here.  Comments are welcome!

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.

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.

According to Antony Karabus, President and CEO of Karabus Management these five strategies for retailers are important in order to emerge as a strong retailer.

1. Optimize cash and cost management
2. Understand what is relevant and motivates your customer
3. Use science to improve gross margins and inventory productivity
4. Invest in technology correctly and on the right projects
5. Get your supply chain right

There is a lot here to do.  I want to focus on item number two.  This strategy is rapidly gaining attention as a key initiative for 2010.  How are you planning to accomplish that?

How do you determine what is relevant and what motivates customers?

Your data is rich in insights into these questions.  Have you spent the time and resources to mine that data and discover what makes your customers tick?  This is equity that you own.  Use it.

Determining your Key Value Item list is a critical place to start.  It sets the stage for your pricing, promotional, and merchandising strategy.  Here are a few tips.

Key Value Item lists should not be defined from:
1.    A top mover list in units and/or dollars.
a.    Store can sell a lot of Ramen noodles…….
2.    Items your competitors have chosen to price at low margins
a.    You may not be buying right
3.    Items your competitors promote frequently
a.    They may be wrong
4.    Items only your best customers purchase
a.    You cannot live off of them alone
5.    What your seasoned executives carry around in their heads
a.    They may not be there tomorrow

Key Value Items should exhibit several of these criteria:
1.    Items that exhibit a high penetration rate in the basket
a.    Key in on key times of the month or week
2.    Items that drive traffic into the store
a.    Loyal customers make more trips for what items
b.    Non loyal customers come into your store for which items?
c.    When?
3.    Items that create bigger basket purchases
a.    Key in on important items that require additional products to prepare
4.    Items that exhibit significant demand shifts when the price is changed
a.    Both in units and dollars
5.    Items that are top of mind due to rising costs
a.    These items can come and go as the market dictates

Develop a list for each of these criteria
It is important to note that these lists do not necessarily contain the same items.
If you have only one list you have not done enough homework.

The key to improving your customer relevance starts and ends with what they tell you each and every trip they make into the store.  Someone once said: “We really don’t know what we don’t know.”  Ignorance is not bliss in this competitive world.  Get into your customer’s baskets and find out what you don’t know.

Don’t be embarrassed…You may think that everyone else in the retail industry is using advanced pricing tools and that you are still in the era of the dinosaurs; the fact it: you are in the land of the dinosaurs, but so is the majority of retailers!

Many retailers that I talk to appear to be somewhat embarrassed, and reluctant to admit that they still do their everyday and promotional pricing in Excel. The truth of the matter is, there really hasn’t been a better tool until recently. Advanced price optimization tools have recently been introduced into the retail arena, before that, margin management and competitive positioning was about all that could be leveraged to determine the best price point.

The first generation pricing technologies have gone through a typical technology introduction life cycle. Initially there was great excitement from the early adopters in the industry for this magical ‘cure all’. A few brave souls ventured into the promised land, only to find that it wasn’t all that it was hyped up to be; there were issues with the first generation solutions. Some of the early adopters got burned and had a bad experience, but there was still optimism that something was there to help price products and services better.

As the first generation solutions lost some of the sizzle, the technologists went away and tried to figure out how to make this promising invention usable by the people that would need to adopt it. These technologists appear to have accomplished their mission, because we are now seeing a significant renewed interest in what is now called “full lifecycle pricing”, and the industry appears to be moving this technology into the “must have” category instead of the “that’s interesting” category.  With many successful installations now in place for several years, across many different retail verticals, the “second generation” technology is now becoming mainstream.

So, you may currently still have a lot of company in the land of the dinosaurs, but it doesn’t appear retailers will stay there long.  Revionics is seeing significant interest in adoption – not just from one department at a retailer, but as a collaborative decision between business users and the IT team.   If you haven’t looked at a price optimization solution demonstration in the last 12 months – it’s a great time to look and see if it’s time to leave the land of Excel.