Retailing has changed dramatically over the last decade. Pricing in retail has traditionally been about setting the right price product by product but due to the new competitive environment that strategy is not enough. Retailers need to address pricing by product category and they need to fill the consumers shopping basket with a combination of products that together adds up to the targeted contribution margin. Letting consumers leave the store with a loss-leader product only is not a sustainable business model.
When we examine the retail process, we find that there are four distinct phases that consumers go through. The successful retailer communicates with its consumers using price and other tools to move consumers through this process:
- Traffic Promotions, advertising and events to get consumers to the store.
- Conversion In store tools and techniques to get customers to purchase.
- Additional sales Tools and techniques to make consumers buy additional products.
- Loyalty Induces the consumer to return to the store.
Successful retailers understand how to use pricing successfully through this process. Traffic generation is typically the consumer acquisition cost, i.e. if the consumer buys the advertised product only; the contribution margin is typically very low. Conversion means opening up the consumers wallet and to reduce the friction to spend while additional sales and up-sell are the main generators of the contribution margin. Loyalty generating pricing is used to reduce the cost to acquire consumers.
We have seen that most retailers focus on the first two steps in the retail process Traffic and Conversion. By developing a better pricing strategy for the whole process, retailers can improve business results significantly.
Category management is critical to pricing for profit in the retail business.
Retailers typically sell so many different items that it is impossible and not even optimal overall to optimize prices for each item individually. Therefore category management is critical to pricing successfully in the retail environment. We help our retail clients group items into appropriate categories that make sense in terms of consumer response to price. We employ price optimization methods to model buying preferences to categories, including private label goods, in order to maximize profits for the store.
One aspect of category management is deciding which items are likely to be purchased along with a major purchase. Retailers must understand which part of an offer is most interesting to consumers when making their buying decisions. For example, if a consumer comes into a store to buy a computer printer, they will look for a good price on the printer. But they are also very likely to purchase additional items like a USB cable, paper, extra ink, and so on. This is Retailing 101 for most people in the industry, but how can we improve this approach? PriceGains work with retailers has revealed many previously unidentified profit opportunities by re-categorizing accessory items and optimizing prices based on these new categories.
How to manage the Click and Bricks challenge.
One of the most interesting challenges in retail is deciding how to vary price across different sales channels, including internet channels. If your retail chain has an internet store as well as physical stores, you must compete in two very different environments. For example, location is a major factor in the success of a physical store. On the internet, other factors like ease-of-use, brand, selection, and delivery time are much more important. Sometimes it may be quite impossible to use the same prices in the online store as in the physical store, be competitive and maintain profitable margins all at the same time. PriceGains approach to this is to model the consumers willingness to pay in each channel for your products and your competitors products in a product category. With these techniques, we can determine the optimum price in each sales channel and we can also model effects like cannibalization between products, categories and channels.
One successful approach is to use PriceGains Price Optimization to determine willingness to pay based on location rather than on a specific product. We work with the retailer to select product categories for testing and present consumers with different prices and locations for the same type of product. We carefully determine the minimum sample size and demographic composition of the surveys in order to ensure accurate results. Using our proprietary optimizing techniques, we analyze the results of our surveys and determine price indices for each location in the study. From that data we can help the retailer figure out exactly how prices should differ between channels in order to optimize profitability.
Your pricing software may be excellent, but are you using the best strategy to optimize profits?
Large retailers often employ sophisticated software systems that can adjust prices and dynamically measure the effect of price changes on demand. Pricing systems like this work well as operational tools and provide invaluable data for the retailer if they are set up properly.
PriceGains role is strategic. We develop the parameters for pricing tests and also to identify the pricing index for each product category and retail channel. Essentially, the pricing indices provide valid starting points for dynamic price/demand tests based on your customers willingness to pay, as revealed in the PriceGain Optimization process. Enterprise level pricing systems provide incredible leverage to optimize prices, but only if the pricing strategy is properly thought through and implemented in the pricing system.