The price is right (right?)

Discussion
Aug 06, 2014

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?

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18 Comments on "The price is right (right?)"

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Camille P. Schuster, PhD.
BrainTrust

Analysts do not have the time, skill or rewards to focus on what is really important; understanding their best consumers well enough to create innovative consumer experiences in collaboration with partners. It is easy to start a promotion. It is much more difficult to determine the long-term ROI of that promotion, or to determine which promotion has the best effect, or whether another type of promotion might lead to advocacy by loyal consumers. More promotions are the easy solution, but not necessarily the smart solution.

Zel Bianco
BrainTrust

It’s never an exact science. In fact, it’s a combination of art and science, and that is why price optimization is not foolproof and not easy to do, at least not on a consistent basis. As stated in the above piece, many retailers identify too many of their categories as traffic drivers. Does that skew the optimization? The science also seems to change from one solution to another.

There are so many factors and variables that need to be taken into consideration that it’s no wonder many retailers don’t know who to listen to and believe. I am not saying they should not be used. They are certainly better than using your gut! Right?

Ryan Mathews
BrainTrust

The question is a bit miscast since it assumes the assumptions to be correct.

There are multiple approaches to price. One certainly would optimize each transaction and may be effective in the very short run. In these cases, price optimization tools are very useful.

Another is based on the notion that creating effective price impression is more critical over the long haul than optimizing any individual price or set of prices. In this case price optimization tools can guide broad pricing policies but are probably going to be less cost effective.

As always, I remain in the camp of those who believe creating a strong price impression trumps extorting an extra nickel now and then. That said, I disagree with excessive promotion as an effective pricing tool.

Ralph Jacobson
BrainTrust

Specifically in the grocery business, many retailers of all sizes still use gut feel to drive many pricing decisions. The capabilities of price optimization and promotion optimization technologies leverage intense mathematical analyses that teams of people could never effectively replicate. Many organizations either aren’t aware of that and/or they aren’t aware of the potential benefits of that. Awareness is the critical issue preventing further adoption.

I have seen these tools optimize pricing strategies and tactics both online and off without over-promising the business outcomes. The tools can take age-old tactics, like price zones, and automate the process and reduce overall price-changing needs, and maximize effective revenue and profit realization. If you can’t tell, I’m a big fan of these tools.

Bill Davis
BrainTrust

Lack of awareness for how best to deploy and manage price optimization tools among most retailers, and possibly the fear that it’s igniting a race to the bottom. Being able to know what their competitors’ prices are and develop a strategy for how to compete against that is just starting to emerge with most retailers. Agree with the comment that within the next two-to-three years “I think it’ll be the industry standard, table stakes.”

Also agree with Paula that retailers need to more effectively manage their pricing function because the low price battle is likely to be won by other companies (and I would also include Dollar Tree/Family Dollar).

Dr. Paul Helman
Guest
Dr. Paul Helman
2 years 1 month ago
Two opposing forces hold back a more widespread adoption of price optimization systems. One force is the belief of some retailers that there’s not much science behind price optimization, and that their intuition, combined with simple, non-scientific tools, is the best solution. The opposing belief, held by many other retailers, is that it would be great to have a price optimization system, but that the science required is impossibly difficult to get right. The retailers who believes that there’s not much science behind price optimization tend to combine their intuition with primitive spreadsheet-based pricing solutions, purchase from third-party vendors simplistic, non-scientific pricing solutions, or even believe that they can build a price optimization solution in-house. The complexity of what is required for a quality, scientific price optimization solution implies that none of these approaches will begin to achieve the return that an established, scientific system can provide. The camp that believes that the science required is impossibly difficult to get right is closer to the truth! The science is “almost” impossibly difficult to get correct. The two components—forecasting demand and searching for optimal prices—are immensely difficult scientific and mathematical problems. The few quality scientific solutions that are available have taken… Read more »
Keith Anderson
BrainTrust
Important research from RSR. I’ve previously seen research concluding that 75 percent-plus of all U.S. grocery volume already flows through retailers using some form of rules-based price optimization software (e.g., Revionics, IBM DemandTec, Dunnhumby KSS Retail, etc.) I suspect the percentages are rising in discretionary categories as well, perhaps with an emphasis on markdown optimization. This is unsurprising given increasing price transparency and competitiveness. Walmart’s unit economics have convinced it of its advantage for basket-level price competitiveness, hence the imminent rollout of SavingsCatcher. Amazon’s unique business model and dynamic pricing capability often (but definitely not always) gives it an edge at the item level. All retailers must get more sophisticated about their pricing strategy, both in-store and online. This starts with better information about competitors’ pricing, better analytics on elasticities and cross-elasticities (product and category), and more rigorous and better-executed approaches to executing optimized prices. Many will, and should, compete primarily on non-price factors like selection, service and convenience. But leaving pricing to intuition (or worse, chance) is a losing strategy. The article thoughtfully raises some of the key pitfalls of this more transparent era—namely a race to the bottom. When used strategically, price intelligence and optimization solutions can actually… Read more »
Alan Lipson
Guest
Alan Lipson
2 years 1 month ago

As Ralph Jacobson points out, these analytical engines are very powerful and can process large volumes of data very quickly and generate useful information for the price optimization solutions. These tools are very helpful for assisting the merchandisers with figuring out the appropriate price points and times for regular, promotion and markdown pricing.

Looked at alone as a mechanism for driving volume of sales for a given product or time frame, these solutions work well. However, by adding customer information in the form of shopping history, preferences and understanding of how the customer wants to be communicated with etc., the retailer can increase their effectiveness of the promotion, as highlighted at the end of the article by Ken Ouimet.

Naomi K. Shapiro
Guest
Naomi K. Shapiro
2 years 1 month ago
Toto, I’ve a feeling we’re not in Kansas any more. Surely retailers know by now they can no longer fly by the seat of their pants, determine and execute price changes manually, price dynamically, set rules-based pricing, and remain competitive WITHOUT these tools and technology. Looking at the section on Pricing Technology Solutions in a recent RSR study, 50% of the respondents indicated that they were in the process of evaluating and selecting a rules-based pricing engine as one of the “tools and techniques to manage the pricing process.” (Note: This 50% figure is from the group identified by RSR as “laggards”—slow adopters, less successful business numbers, etc.) Only 8% of “winners” indicated that they are evaluating/selecting a rules-based pricing engine, presumably because they’ve already got one—or have already done their homework. One of the reasons RSR principles Nikki Baird and Paula Rosenblum called their research report “Tough Love” was because retailers seem to be reacting to perceived issues, such as the consumer being extremely price conscious, which isn’t totally borne out at this point. And, while retailers cite needing a rules-based pricing engine and other pricing solutions, they also spend a lot of time worrying about inventory, promotions-related issues,… Read more »
James Tenser
BrainTrust
Tools for setting base price in grocery using optimization have moved well along their life cycle since they were introduced in about 2000. The basic science is fairly well-known by now and there are many choices available. In an increasingly promotional environment, adjustments to base prices (even those calculated using a sophisticated model) may not deliver the desired benefits on their own. That’s why the most comprehensive solutions apply the optimization model to the related issues raised by space and assortment planning, promotions, and markdowns. Big retailers can justify these fairly easily, but the cost and required attention may seem too great for smaller ones. Cloud-based (SaaS) solutions may help mitigate those objections in part by keeping the costs more proportional to the size of the business. I’m quite a supporter of the notion raised in the final quote from Ken Ouimet, that individualized promotional prices may be set based on an understanding of shopper intent. Sometimes called participatory pricing, these cues may be gained from shopper interaction with an app and other sources and folded into a model that has its roots in the original price optimization science. There could be a serious first-mover advantage for retailers that explore… Read more »
gordon arnold
Guest
2 years 1 month ago
There are fewer and fewer reasons to stock up on anything these days. The retail industry knows this better than all others combined. So the order of marketing engagement is to address those with a need to buy something now. What is missing is clearly demonstrated in the shotgun advertising used to get the attention of those with a need and the means to pay for it now. Stacking anything high to watch it fly out the door is no longer working by itself. The seller focus is pricing to attract as many customers as possible every day. Staging events around the pricing of everything in the store that might sell is further convoluted by lumping any and all B+ to A+ turn items into a new category. This may not be getting the results needed as per a continuing decline in store receipt volumes and sizes for the entire market(s). The search for an advertising method with content that really is unique to the messenger is elusive unless it is a constant reminder of industry leadership in overall quality, service and support followed by availability and then of course, pricing. In an anemic economy, there is no room or… Read more »
Mark Price
BrainTrust

While price optimization tools have the potential to improve profitability for a retailer as a whole, theses companies are still structured around merchants who buy for specific categories and are compensated on delivered margin for that category most frequently.

Technology can provide the answer, but it will never be implemented when there are such competing interests.

Jacob Suher
Guest
Jacob Suher
2 years 1 month ago

Maybe retailers are confused between the choice of using price optimization to set long-term prices against the need to run optimized promotions. The technology obviously can and should help price products for long-term success. On the other hand, a myopic focus on price cuts will be a “race to the bottom.” Retailers should look for non-price promotions and creative uses of price promotions. For example, in one study, we found that a small coupon can nearly double shoppers’ unplanned purchasing if the coupon is individually optimized to increase in-store travel distance. In other words, the role of the price promotion was to build the basket rather than to increase the sales of a single item.

Graeme McVie
Guest
Graeme McVie
2 years 1 month ago
I’ve worked with dozens of retailers on price optimization and what I’ve found is that Price Optimization is a powerful solution. But like a powerful car, if you drive it in the wrong direction all that happens is you get to the wrong destination faster. To be successful you need all solution components to be working: clean and complete data, sophisticated econometric models, an advanced optimization engine, comprehensive objectives and rules and easy-to-use software. Perhaps the most important ingredient is a talented team of individuals who know how to drive the optimization to the correct destination. When you put the whole package together it determines the right strategy, translates that strategy into the right price for every item in every store, achieves the retailer’s strategic, financial and operational objectives, and ensures that prices are consistently managed and maintained to meet customer needs. Going forward, the incorporation of the customer dimension into these solutions will be vital. This enables retailer’s to target more of their prices to the needs of their most valuable customers and also provides integration with personalized pricing through electronic offers delivered via smart phone apps. Retailers need to make smart investments to lower prices where loyal customers… Read more »
Ed Gilstrap
Guest
Ed Gilstrap
2 years 1 month ago

The airlines have “mastered” price optimization. They go through long periods of time where they lose money, and for the most part their customers hate them.

The success of some no-haggle car dealers, and EDLP retailers might indicate that customers like fair, good value pricing.

Everyone loves a great deal, but it doesn’t result in loyalty. Everyone hates paying too much, and the resulting “reverse-loyalty” is very strong.

Mihir Kittur
BrainTrust
Senior leadership in many retailers are faced with several quarters of constantly eroding revenues. They are trying several things and there is a lack of clarity of what is working and what is not. This increasingly complex retail environment and a lack of a game plan is the first problem. I truly believe one needs to have a game plan or a strategy and the tools will follow. That being said, many retailers have become so reactive that they are not giving much thought to their pricing strategy, or have stuck to their old ways since they are not sure if the new ways will work. However, not doing anything is clearly not an option. Technology can help when it is informed by a game plan and the right talent to execute it. It is going to take a combination of technology and deep knowledge about retail (customers, categories, etc) to succeed, and I don’t think it will be solved by technology alone. Increasingly there is going to be no option but to heavily rely on technology for certain aspects of data crunching and programmatic price recommendations and changes. Participating commerce or intent based pricing is a great idea and… Read more »
Arie Shpanya
BrainTrust
Price optimization tools should ideally eliminate these promotion-driven races to the bottom, but in the wrong hands these tools can destroy margins. Most optimization software allows for retailers to price products based on competitors prices (e.g. always be 5% less than Competitor X), and if retailers focus on these rules, they can see the downward spiral continue until margins are gone. The science is evident; there is no doubt that the econometric analysis contributing to price optimization is incredibly valuable. The problem is, pricing is just as much art as science. Strategically planning your price points, and providing clear reasoning for why your product commands that value is where pricing becomes an art form. Or at the very least, a plan requiring more than quantitative analysis. Retailers should realize that price optimization tools are not an automatic profit booster. The fact that people see the software as ‘table stakes’ in a few years means that retailers should not be seeking the tools as a differentiator. Instead, companies can emphasize service, quality, and/or support and then tag a price they believe to be reasonable in comparison. Price optimization software plays its part by automatically adjusting the prices to fit the company’s… Read more »
Alexander Rink
BrainTrust
2 years 29 days ago
The term “price optimization” can be seen to include any number of capabilities, such as price recommendation based on historical point of sale analysis, price elasticity analysis, zone pricing, markdown optimization, dynamic repricing, rules-based pricing and recommendations based on competitive price intelligence, to name a few. As to why retailers are not adopting these solutions more rapidly, it stands to reason that they are having challenges in deciphering the messages and offerings of the various providers, and striving to determine which solution will best address their unique needs. The most successful offerings are those that stake out a clear proposition that make it easy for retailers to see what kind of value they will generate for them. And, given the adoption hesitation on the part of retailers, it is fair to say that the majority of vendors must not be displaying that kind of value. With the right solution, or combination of solutions as the case may be, the benefits for retailers will be increased sales and margins through right pricing of individual and groups of products, by zone or even by individual. One less obvious benefit will be increased trust in the retailer’s brand as they get their pricing… Read more »
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