Pricing Strategies and Promotion Best Practices

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

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.

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

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.

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

Looking back, when Revionics first developed the Promotional Planning module, we really did not know the exact capabilities we were going to be featuring. However, Revionics truly has cultivated a distinct Promotion Planning modeling module. In all reality, we were hoping to help customers take the guess work out of determining which items to promote and at which price to promote them at. Conversely, Revionics’ Promotion tool possesses more than that.

The great thing about the Revionics Planning tool that really sets it apart from the competition is that it not only offers assistance in establishing which products should be promoted at what price, but it also aids in distinguishing which are the best offers to feature in addition to where placement would be most beneficial for these products within the ads.

Our promotion optimization not only takes the risk out of running a promotion, but our customers are better able to reach their goals by planning their own events and having the ability and flexibility to make their own recommendations for the right price, right offer, as well as the right time to promote before the ad even goes out!

Revionics has the best promotional planning module in the industry! Our competitors simply do not have this capability. There is no question about it that our Planning tool sets us apart from our competition. Our goal at Revionics is to offer a unique, incredible, one of a kind service that takes the services we offer for pricing one step further in not only bettering us as a company, but in our customers efforts as well.

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 Jim Sills, Ph.D., CTO, Revionics Inc

True or false? Is it possible to lower prices and make more profit and revenue, even at a lower margin? For many, this seems counter-intuitive, but it is definitely true. We were recently working with a retailer on their detergents category where they had priced an Ajax product at $1.79. We found this product by sorting on price elasticity in the price review screen of RAPS Everyday Price Optimization. The price elasticity of Ajax was greater than 3.0, which represents very strong price sensitivity. Most items have a price elasticity between 0.8 and 1.4.  For those unfamiliar with the calculation, price elasticity is simply the percent change in units divided by the percent change in price. So a price elasticity of 3 simply means that if we drop the price by 10%, the units will increase by 30%. The table below compares profit and revenue between the current price of $1.79 and the $1.49 price suggested by Revionics:

Notice that both revenue and profit increase for the suggested price of $1.49, which is lower than the retailer’ current price of $1.79. Notice that while the margin decreased from 39% to 27%, both the profit and the revenue increased.

Many retailers are missing the opportunity to increase profit and revenue by lowering the price on sensitive items that are priced too high. Revionics solution, RAPS, applies powerful scientific algorithms to isolate the influence that price has on unit sales.  We empower the retailer by making this visible and actionable in their pricing strategy.

• True or false? Price sensitivity can vary by store. This is not a trick question—the answer is yes, of course, some stores are in affluent locations and others are not.

• True or false? Successful retailers know the price elasticity for each item in each store. Yes, as you guessed this is true.

Look for next month’s blog when we challenge our readers to a game of truth or dare…

Truth:  Do you know price sensitive each item is at each store?
Dare:  Challenge us to raise your profits while lowering prices.  This is a game  worth playing!

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: 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?

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

I was listening to the television the other night and heard a Walgreens commercial.  Their tag line was “we carry all of the things you need most.” What caught my attention was that they were not typical drug store items -but items that in the past have been considered traditional grocery SKU’s such as soda, milk, cereal, and even ice cream.

Every retail format is in the grocery business.  No wonder retailers are bemoaning soft sales and pulling their hair out wondering where it has gone.  IRI reported that the drug channel’s dollar sales growth outpaced supermarkets, and food, drug and mass merchants combined, in all but two of the 20 Center Store categories they profiled in their latest issue.

I was talking to a gentleman from the convenience store segment and asked him what his biggest competitor was in today’s times.  He said that their research had indicated that it was also the drug stores-especially with the younger population.  He shared no numbers but they are now within their strategic focus.

Staying focused on one more retail type is difficult but seems to be growing in importance.  It is important to understand what categories your customers are purchasing in what retailers and who your real competitors are.

IRI also pointed out that there seems to be three shopping trends occurring.

• The first group is buying in bulk to save money on a per unit basis, as well as trips to the store. Who does this well in your market?  What are the key items to carry in this area? Pricing these items appropriately is important in order to gain credit for that bulk price perception.

• Others are stocking up on items when they go on sale. Discounts and special offers receiving the most attention are those in categories that make at-home eating convenient.Drug stores are not yet carrying enough variety in the at home eating items-yet.  They are discounting heavily though.  Promotion planning is taking center stage in all formats and it must be effective in creating sustainable traffic and measured accordingly.

• A third shopper group is sticking with a consistent budget, opting for smaller basket sizes and more frequent visits.Who is top of mind with best price for the dollar in your market?  How do I manage my margin mix in order to attain this perception?

Lots to think about!  What other formats are creating an issue for you in sustaining sales?  The Revionics team is in the thick of these questions everyday and would love to hear your thoughts and ideas.

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.

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

Times are changing… or maybe it’s more appropriate to say times have already changed. The easy days of having the pricing function be side task in a retail organization are over; price is more important than it has ever been.

The economy seems to have un-expectantly jumped up and slapped retailers in the face, and knocked them back a few steps, a little dose of reality; but they are back fighting even stronger after gathering their wits. Nobody was prepared, nobody saw it coming, nobody wants it to be here, but it is here, so we have to deal with it. Higher unemployment, lower wages, higher medical costs, higher fuel costs; money is tight. Consumers are looking at the price they are paying for products, and you need to be looking at those prices as well; it is very important.

For decades retailers have had very friendly and somewhat naïve customers, life has been good, no need for them to watch every penny spent…. Well, times have changed. Consumers are more aware of product prices than they probably ever have been in their entire life; retailers have not had to deal with this in the past. Add that in with the proliferation of discount retailers, and it makes running your business much more difficult than it ever has been. To compete in today’s retail environment, it is imperative to have a sophisticated tool to help you out. Full lifecycle pricing analytical tools are now part of the mainstream arsenal of tools retailers can use to be successful; you can’t survive without it.

Price optimization technology has come to be a mainstream technology that has been around for over a decade.  There are hundreds of successful installations in use today, helping to implement retailers pricing strategy in a better fashion than if done via Excel sheets, with simple margin management, or by matching competition.    Retailers who have not taken the time to investigate today’s pricing technology are missing a critical opportunity to change with the times.