RNG has recently updated our work on retailers developing pricing as a strategic capability, a retailer growth strategy for merchandizing innovation that raises some interesting opportunities for CPG firms.
Pricing as a strategic capability focuses largely on pricing optimization programs but has many consumer centric implications. Retailer adoption of pricing optimization tools and approaches is widespread with RNG estimating over 80% of supermarket ACV involved in some way. A recent survey by RSR Research indicated that 61% of FMCG Retailers rated pricing strategies as very high in strategic importance. Many are engaging consultants and software firms like SAP
, and DemandTec
to provide price optimization capability into their pricing and merchandising organizations.
Unlike category management or even more recently the newer discipline of promotion management, pricing optimization programs have not been collaborative between retailers and suppliers even when discussing the strategies and rules that guide and constrain the process.
This week's newsletter sheds some light as to why pricing optimization is an important enabler for both retailers and suppliers to find growth and profitability in an increasingly challenging consumer environment.
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Tim O'Connor, Vice President
Why Pricing Optimization?
Price alone is no longer a strong differentiator in itself, but it remains a critical driver of perception in the marketplace, competitiveness, and profit leverage.
The current economic challenges heighten the need to be right on price as the recent scrambling by Whole Foods demonstrates
. Retailers' dependence on promotional programs continues to grow, increasing their vulnerability to shoppers that "cherry pick" rather than building a loyal core shopper base. And of course, cost pass-through is more strategically complex in a recessionary or "stagflationary" economic environment (when inflation and stagnation occur simultaneously). As the complexity of pricing increases, so does the risk of errors, further accelerating the need for an intelligent approach to pricing.
What Does Pricing Optimization Do?
Price optimization ultimately simplifies the complex - enabling retailers to merchandise products with increasing precision and efficiency, moving from national to zone to cluster to store-specific pricing, promotion and assortments. with standard heuristics, business processes, and metrics.
These toolsets provide analytical horsepower and breadth of view that traditional methods cannot. Pricing optimization tools generate optimized price recommendations based on the price elasticity of items, categories and departments all the way down to the store level, as well as provide the implicit margin and sales consequences of those recommendations and the alternatives.
This capability enables the retailer to focus on pricing strategies to satisfy its core shoppers, therefore, pricing optimization needs to focus on enabling suppliers and not to separate pricing or over complicate the business process.
Price Optimization - Why is it Important?
Understanding pricing optimization is a key capability and enabler for growth. It enables suppliers to:
- Determine the best role for categories profit builder, turf protector, and so on - given shopper preferences.
- Meet category objectives by adjusting regular everyday prices in conjunction with promotions and clearance or markdown price.
- Improve decision support with "what if" analysis to see the impact of pricing on sales, profit, and price image for any SKU across the assortment.
Pricing optimization enables a strategic approach to pricing and frees suppliers to act on customer centric insights. While pricing optimization is a developing science, there remain a number of limitations, including:
- Marketing drivers, which are not an input to the model.
- Innovation, which is difficult to model.
- Consumer/shopper insights, especially of key target segments, are still highly influential to pricing strategy.
In-store promotion, marketing landscape and retailer expectations will change and there is a big opportunity for vendors to guide and lead to better consumer solution.
Retailers and Price Optimization
Increasingly more and more retailers are utilizing pricing optimization tools to make decisions around pricing. Retailers benefit from price optimization in several key different ways, including:
- Margin and revenue enhancement - Intelligent, rule-based pricing is a key driver of profitable growth. However, most retailers ensure profit improvement objectives are tempered with solid and timely competitive information.
- Increasingly targeted and relevant merchandising - Retailers with strong customer segmentation models stand to benefit from the enhanced precision with which they can localize and price their assortment.
- Greater visibility into pricing decisions' impact on image and shopper behavior- Price change impacts are continuously monitored and measured at various levels: business unit, department, category, and item. The tools help articulate various possible outcomes (i.e. the model's recommendation and its alternatives) and their implications.
- Strategic freedom - A more strategic approach to pricing lessens retailers' need to price opportunistically or rely heavily on vendors. Promotional funds are often redeployed to support marketing and shopper development objectives.
|RetailNet Group is the leading insight and advisory firm focused on retail growth strategies and consumer-facing transformational capabilities. We are deeply experienced retail/consumer analysts and strategists working exclusively to help brand-led businesses and large-scale retailers grow.
Note: Articles contained in this newsletter are collected from a variety of sources and links can expire over time.
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|Meet Our Analysts Dan W. O'Connor
is the President & CEO of the RetailNet Group. He also is the Founder of Management Ventures, Inc. (MVI), a WPP Group company. Dan is a widely known industry speaker and thought leader.
Aaron Chio is a Senior Analyst leading RNG's development of new research, insights and growth strategies in Latin America.
is Vice President at RNG, currently responsible for RNG's Growth Strategies Curriculum and European market insights.
is a Senior Analyst and responsible for RNG's North American research practice and transformational