Pricing Strategies and Promotion Best Practices

By Jim Sills, Chief Technology Officer, Revionics Inc.

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.

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: 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 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: 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: 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.

This economy has been tough for most consumers. The average net worth of individuals has decreased by more than 20%, and on average, 401Ks have decreased in value by 30-40%. Unemployment rates are the highest they have been in over 25 years, and gas prices are unpredictable.

The challenging economy caught many retailers off guard. During the holiday season, for example, many retailers had excessive inventory levels left on their store shelves. Private label brands have seen unprecedented growth as a substitute for national brands, and three out of four categories are losing buyers.

Undoubtedly, today’s consumer has changed. Families are eating out less often. Shopping trips are less frequent, and consumers are stocking up on items instead of often running to the store to pick up a few items. More people are using coupons and responses to ad offers as they shop around more for the best deals.

Many people want to know: Where is our economy heading? Clearly, there are early signs that banks are starting to slowly lend again, business confidence is returning, durable goods sales are increasing, and home sales are finally rebounding. Most economists predict that our economy will see positive GDP growth in 2010, if not sooner.

Despite an improving economy, however, many believe that consumers have made long-term changes to the way they shop. It is to be expected that many consumers will continue this new economic behavior that they have adopted during the recession. With an improving economy on the horizon, a retailer can take steps to get ready for the impending recovery:

• Retailers must monitor their consumer demand signal more frequently. By analyzing their data, a retailer will better see changing consumer sensitivities (elasticity) to prices and promotions. On elastic items, demand will change as price changes. Demand is less influenced by price changes on inelastic items.
• Retailers must review their price strategy effectiveness. Price strategy cannot be constant; it must change with the economy. Retailers must proactively manage costs and margins while reducing competitors’ control of their strategy. Retailers must reduce reactive responses by leveraging predicative analysis. To do this, they must understand price versus demand impacts with changing elasticities.
• Retailers must improve promotions and offers. They must know their objectives: which products to promote, which consumers to target, which offers meet their goals, as well as what are their predicted results. Also, retailers need to leverage advanced tools that will identify the best items to promote and the best prices for those items.
• Retailers must mark down items more optimally. They must free up working capital tied up in unnecessary inventory by using item-store demand to predict inventory depletion as a function of time and place as well as increasing sell-thru and margin.
• Retailers must build upon the shift to private label products solidified during the recession. Private labels are growing, and when consumers are able to spend more money, they need not abandon these private label products for the benefit of national brands. Improving marketing and messaging around private labeled items is essential as national brands try to reclaim lost ground.

What will the economy ahead look like? As the economy recovers, will consumer behavior and spending patterns return to peaks that we saw before the recession? Will high jobless rates mitigate the pace of the recovery? These are some of many of the questions consumers and retailers are thinking about. Nobody knows the answer for sure. Bottom line, as retailers and consumers, we need to be prepared for anything! Learn how Revionics’ pricing software can help your retail business!

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

Since its launch, Revionics University has built a strong following from Revionics customers as well as other retailers who have been attending regularly scheduled seminars on industry-relevant topics. Revionics University has a formalized curriculum that touches on a variety of topics, from introductory courses on its products, to general industry topics relevant to pricing analysts, category managers, executives, and anyone involved in the retail industry. It may be perceived that Revionics University only offers courses targeted towards educating its customers in relation to their products, but it is much more than that. Revionics University is a top-notch industry forum that provides a number of courses pertaining to industry trends and best practices related to pricing and category management.

Why should you sit in on one of Revionics webinars? The benefits of Revionics University are numerous for anyone who desires to stay current on industry best practices and current, or future, technology trends. Designed to take less than one hour, the web sessions are very focused and share key industry lessons. Sitting in on a webinar will help you become more knowledgeable about the given topic within the technology industry.

Courses that Revionics has already hosted — “Retailers: Are You Ready for the Recovery?” “Next Generation Promotion Optimization,” “The Economic Impact on the Four Pillars of Category Management,” and “Good, Better, Best: Maximizing Private Label Opportunities” — demonstrate issues that are currently relevant to retailers and executives. These courses were recorded for archiving and are available for your viewing today. Upcoming courses include Integrated Forecasting, Global Retail Trends, and Competitive Data best practices.

Revionics employees are continually striving to be ahead of industry trends, and educating themselves on industry best practices. At Revionics, we are fortunate to be able to focus specifically on demand intelligence and the related benefits of it in regards to pricing, category management, and inventory replenishment. We have partnerships with leading retailers which enable us to stay informed on best practices in the industry. In addition, Revionics staff members bring years and years of their own quality experience retail industry experience, as well as vast experience in retail technology.

To sign up for a Revionics University session, visit our website, www. revionics.com/educate.