The price is right (right?)
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
A new survey of retailers from RSR Research shows that nearly half said their pricing strategy has become more promotions-driven over the past three years, while 55 percent reported an increase in the volume of price changes sent to stores and other channels.
"It’s almost like a drug," says study author and managing partner Paula Rosenblum. Retailers need a sales boost, so they run a promo. Citing a race to the bottom that can only have one winner, Ms. Rosenblum writes, "Sooner or later, the industry must shift to fewer, more strategic price changes."
The vehicle driving that shift is price optimization technology, already utilized to some degree by many leading retailers. But within the next two to three years, "I think it’ll be the industry standard, table stakes, if you will — and not just for the big boys but even for retailers with 25 stores or fewer," says Jeff Bulger, client success partner at Revionics, a provider of merchandising optimization solutions.
One key thing price optimization tools can do is help retailers identify the roles various categories play — which are traffic-builders, which are margin-drivers and which are destinations that help attract and retain customers.
The problem is many retailers identify too many of their categories as traffic drivers, often called "key value items" or KVIs. Pricing on KVIs can also be better tiered based on their price-sensitivity.
For non-KVIs, temporary price cuts (TPRs) are still the most popular form of promotion, though experts believe retailers can certainly be more creative as well as judicious in how they use them. Sharat Mathur, SVP at IRI Global Analytics & Consulting, said, "If you’re offering 12-packs of soda at three for $10 or $12 for 48 weeks a year, shoppers will never play $4.99 because they know if they wait a week, it’ll go on sale."
Price optimization tools can help retailers identify which items lift the total basket by encouraging customers to buy more than they would normally or, better yet, to buy the product from them rather than a competitor. They also promise to identify which trade funds they should accept and which they should negotiate back on.
Price zones represent another way retailers are tailoring prices to customers in a particular area. A handful of forward-thinking retailers are also using shopper loyalty data to create customized offers delivered via a coupon generated at check out, an e-mail, a text or, more recently, a mobile app.
Just how much do retailers stand to gain from an individualized, intent-based approach to pricing? Said Ken Ouimet, CEO of Engage3, "With (regular) price optimization — raising or lowering prices on the right products — we’d see 1 percent of sales would be driven to the bottom line. But with intent-based price optimization, we’re seeing over 10 percent of sales being driven to the bottom line. So it’s 10 times more powerful."
What’s holding back greater use of price optimization tools? What are the technology’s obvious and less obvious benefits? Which touted solutions may wind up being a case of overpromising?