Making Sure the Price is Right
Market Basket, a family-owned chain of grocery stores in Louisiana and Texas, is known in the communities it serves as a high-service grocery store. But to many customers, high service translates to high prices, and that makes it tough to compete in a crowded market.
"We compete with Kroger and H-E-B, and we felt like because we're a high-service, friendly operator, we had a high price image, and we needed help (with price optimization)," says Skylar Thompson, president of the 34-location chain.
So about five years ago, Thompson changed the retailer's pricing process from a combination of basic competitive analysis–manually checking the prices of a short list of high-volume, price-sensitive items–and intuition to a sophisticated pricing optimization system that crunches mountains of data from numerous sources to determine the ideal prices for thousands of products throughout the store.
Market Basket's move reflects the sea change across grocery retailing–the wizened category manager who set prices by visiting the competition and using his "gut" has long retired, replaced by analysts who use every scrap of data available.
"Big data and other technology now provide the ability for a big retailer to process large volumes of variables in real time to be able to make a price determination," says Sudhir Holla, senior vice president for retail at Ugam, a provider of managed retail analytics.
MORE THAN CRUNCHING DATA
Having tons of data available is one thing; putting it to good use is another.
"Grocers have had POS and competitive data for many years. The real question is what are they able to do with that data?" says Alan Lipson, global retail industry strategist for SAS.
The systems available today can help a store shift its pricing image among consumers in a variety of ways.
Market Basket, for example, wanted to use its pricing optimization to help shift consumer impressions away from the store's high-price image. So its pricing system, which is provided by Austin-based Revionics, uses that preference when it crunches the numbers. It combines price information from competitors, the store's own POS, Nielsen/IRI, and various other sources to develop a weekly set of suggested price adjustments that create a more price-competitive image for the retailer.
However, the prices Revionics suggests are not just across-the-board lower than the competition; that would be easy but could risk the bottom line. Instead, the system also considers costs, promotions, customer habits and other elements besides competitor prices to selectively adjust prices up and down in a manner that protects margins and the overall bottom line, even while the image of lower prices is being projected to consumers.
A key part of the strategy is to make sure prices are competitive with certain high-visibility products, such as milk and bread, so that consumers perceive the store as competitive. Prices for products that consumers are less likely to compare, such as baking soda or hair color, can be adjusted more for margin than competitiveness.
"We're a high/low pricing operator, and in that pricing format our regular pricing is a little higher, we have weekly ads, and we're very sensitive of the competitive items," Thompson says. "With Revionics we've been able to expand the list of items we're competitive with, and it does analysis on price sensitivity and elasticity and makes suggestions on items that are perhaps priced too low."
Naturally, Market Basket's competitors are not sitting on their hands. Kroger recently lowered everyday prices on a range of categories they perceive as important to customers, such as produce, organics and natural foods, says Andy Kalamaras, senior vice president for KSS Retail from dunnhumby, which is partially owned by Kroger. Kroger uses dunnhumby's PriceStrat system to optimize its prices, Kalamaras says.
"Retailers can use PriceStrat to understand price elasticity based on their customers and customer segments, so they can then present the right prices and promotions," Kalamaras says. "In addition, retailers can create business rules that enable prices to update automatically in response to changes in competitor pricing."
BIG PICTURE STRATEGY
As Market Basket did, savvy retailers embarking on price optimization have to start with a strategy. Nearly every store wants consumers to think its prices are low, of course, but there are variations on that theme.
"The big [strategy decisions] are whether or not to be EDLP (everyday low price with diminished use of promotion), high/low (highly promoted), or some hybrid in the middle," says Randy Evins, a senior principal for food, drug, and convenience at SAP. "It's all about perceptions. If I can raise my regular retails without destroying my pricing image, yet still capture loyal shoppers with direct offers, I have really maximized my promotional spend and increased my bottom line substantially (think Kroger, Publix, H-E-B). The other idea is to go completely EDLP and eliminate all promotions and attempts to entice the masses to shop (think Aldi, dollar stores, etc.)."
Another strategy is called "pricing for value," a phrase coined by author and speaker Anne Graham.
"Price for value aims to get as close to an optimal price for each item as possible, based on the value to the customer," Graham explains. She says customers perceive value in one of five ways–saving time, saving money, solving a problem, creating a "feel good," or providing peace of mind.
"A common grocery example to illustrate this is prewashed, bagged salad mixes, which sell for up to five times the price of a head of lettuce," she says. Retailers can charge that much for convenient bags because they obviously save time; they solve the problem of having to buy multiple types of lettuce to get a nice mixed salad; they created a "feel good" because they easily make a gourmet salad; and they provide peace of mind because they're pre-washed and selected.
Once a store has determined its desired price position in the market, tactics take over. There are countless pricing tactics, and many support the retailer's strategy regardless of what it is. The tactic just needs to be applied in the appropriate direction.
It could be said that using a system like PriceStrat or Revionics is itself a tactic. Such systems are powerful tools, and they facilitate other tactics.
Another prominent tactic in recent years has been customizing prices and offers to specific consumers. By combining loyalty card data with POS and Nielsen/IRI data, retailers can create offers that incentivize customers based on their past purchase behavior, demographics and other personal factors.
Another tactic is providing incentives for making certain purchases. "These can be focused on brand selection, goal setting (how many organic foods were purchased in a time period), etc.," Lipson says. "For example, Harris Teeter has a Fresh Catch Club for fish–for every $50 purchase, you receive a $5 coupon."
A similar deal can create a semi-customized offer for retailers who have shunned loyalty cards. For example, if research shows that a certain type of customer always buys certain products together, the retailer can create a promotion that offers $5 off when a customer buys those 10 products, Lipson explains. It has thus identified that customer–and incentivized her–solely through the offer, not by actually knowing her.
IMPLEMENTATION IS ESSENTIAL
Naturally, a great strategy and great tactics don't mean much if they're not well implemented.
"The aspiration and the reality are quite a bit different," says Kurt Jetta, CEO and founder of TABS Group, a consumer analytics consulting firm in Shelton, Conn. "What they'd like to do, because they have all of this store-level data and the means to understand market pricing, is adjust the pricing by store. But the problem is a lot of chains take those decisions away from the local managers and have the corporate people make these changes."
And that practice often leads to a disconnect between strategy and reality, Jetta asserts.
"We just finished up a big project where we had all this pricing data for a large retailer, and then we found that all the prices were the same throughout the chain! So this big chain has access to all this data and there's no variance between stores."
One factor affecting implementation is the cost of labor. For example, Michelle Flocke, Market Basket's director of retail systems, says they sometimes ask Revionics to reduce the number of suggested price changes when workloads are already high.
"Revionics might say there are 400 changes in this zone, but it may be a heavy week for TPRs (temporary price reductions) and we don't want to do it," she says. "So you can ask it to re-analyze and give the top 200 changes instead of 400."
Jeff Bulger, who is a client success partner at Revionics and manages the Market Basket relationship, says sometimes clients have a hard time grasping the value of spending more on labor.
"One customer was taking 300 to 400 prices a week across several price zones. I told them if you change 1,000 prices a week instead, you'll make $17,000 extra per store per week," Bulger remembers. "But the guy said, 'We can't afford the labor.' Just then the CFO walked by and said, 'You're saying we can't bring in an FTE [full-time equivalent] at 80 bucks a day to earn $17,000?'"
Of course, the bottom line always rules. And if a retailer establishes the strategy, develops the tactics, and implements the price changes that result, the bottom line should benefit.
Says Market Basket's Flocke about their price optimization system: "It's improved our pricing image, and we're getting strong results in our revenue and profit margins."