Data-Driven Pricing in Retailing

Retailers are under pressure to improve profitability and gain a greater percentage of spending, so it’s not surprising that more firms realize the value of price optimization to increase same- store sales and improve their competitive position. But how can retailers best optimize pricing? Experts advise them to move away from a “gut-feel” approach to a data-driven pricing strat­egy. That should lead to the right offer, at the right location, at the right price, with the right range of products to gain a greater share of shoppers’ wallets.

Karen Dutch of Revionics (a provider of price optimization solutions), comments, “Pricing needs to be strategically driven and technology-enabled. Demand-based optimization provides a granular view of shopper and competitor behavior, blended with business and financial strategy and rules, enabling retailers to surgically execute competitive positions while maximizing profit opportunities.”

One retailer that has validated its approach to price opti­mization is Roundy’s Supermarkets, the $4 billion operator of 150 stores in Wisconsin and Illinois under four banners: Mariano’s, Metro Market, Copps, and Pick ‘n Save. “We’re looking to increase sales and margins, while improving price perception,” states Laura Roehl, vice-president of pricing. “Those goals can be at odds with each other, particularly in the short term. This is where we saw the need for a data- driven tool. We also wanted to improve price integrity and consistency.”

Roehl cites five lessons from Roundy’s price optimization work with Revionics, which enabled its stores “to thrive in hypercompetitive markets”:

• For a smooth transition, pre-work and setup are crucial prior to implementation.
• A review suggests details using knowledge (promotional plans, etc.) to complement pricing strategy.
• Fine-tune the tool after initial installation for better results.
• Document and measure results for management review.
• Price optimization provides visibility to elasticity in a way that was previously unavailable.

“Roundy’s effectively uses the solution with a customer- focused approach,” notes consultant Mark Kelso, of Price Revo­lution, who spoke with Roehl at FMI Connect. “Their process has resulted not only in improvements in unit movement, sales, and gross margin, but has also reduced the amount of time spent on developing price recommendations.”

SAS lists several other retailers that have benefited from deploying a price optimization strategy:

• A midsize North American grocer integrates regular price and promotional price activity, letting the firm take into account promotional activity across a timeline to achieve overall pricing goals.
• A European grocer uses price optimization as part of its category review process. It was able to identify a combina­tion of price increases and price decreases to meet category financial objectives.
• A North American regional grocer used localized segmen­tation and promotion optimization to develop new circu­lars customized to neighborhood markets, leading to an increased revenue of 3 to 5 percent.

Howard Langer, of Dunnhumby, advocates customer-cen­tric pricing because consumers respond to prices differently. Thus, he notes that retailers need to understand which custom­ers buy which products, and then set pricing strategies from there. “Instead, most retailers evaluate what competitors are doing with pricing and product costs. This compare-and-con- trast strategy will no longer work, as it no longer resonates with the consumer—who expect personalized experiences. Until grocery retailers customize pricing based on their customers’ behavior and shopping habits, they’ll continue to fail to meet the consumers’ needs.”

According to NCR’s Todd Michaud, the biggest mistake a retailer can make is adopting price management and optimiza­tion systems without a price strategy known, understood, and thought through before, during, and after implementation. He says pricing systems are typically underused by firms, with most using only a fraction of available technology, due to a “lack of comprehensive pricing strategies.” This can include competi­tive and loyalty-pricing strategies, private label positioning, cannibalization policies, zone nuances, ending-numbers price thresholds for changes, and category-specific strategies.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.