Price Optimization and Promotion Management: Powerful Tools for Tough Times and Beyond

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PRICE OPTIMIZATION AND PROMOTION MANAGEMENT: POWERFUL TOOLS FOR TOUGH TIMES AND BEYOND

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THE LONG-RUNNING TV GAME SHOW tions from manufacturers who face the same challenges increase retailer pressure IS CALLED “THE PRICE IS RIGHT.” to find optimal starting prices, promotion BUT IT’S NO GAME FOR RETAILERS, opportunities, and end-of-life pricing to balance gross margin dollars against sell- FOR WHOM SETTING THE RIGHT PRICE through. Concurrently these same retailers IS BECOMING A MATTER OF SURVIVAL— find themselves pressed to manage rapidly declining inventory investments,” write AS WELL AS AN ENORMOUS OPPORTUNITY. Baird and Rosenblum in “Going Local: Emerging Best Practices in Localized Getting a price “right”—to a level that a Pricing and Promotions,” (RSR Benchmark retailer’s customers are willing to pay, Study, January 2009). while still maintaining margins—has Faced with this host of challenges, many always been a tough proposition. Even retailers have turned to price optimization those retailers with effective pricing strate- and promotion management solutions, gies have often faced practical challenges in seeing in them a means to preserve mar- executing them down to the store, shelf gins, maintain sales and manage inventory and product level. Increasing calls for more more effectively during the economic crisis. localized product assortments, designed But such solutions, when used correctly, for the shoppers in a particular region or are capable of much more. They can help even a particular store, have added com- retailers create price and promotion strate- plexity to price planning and execution gies that are true competitive weapons, processes, as have retailers’ expansion into using new, highly relevant data sources multiple sales channels. (both internal and external), and applying These long-standing issues have been powerful analytical tools that take into thrown into sharp relief by the global eco- account the realities of today’s retail mar- nomic recession, which has reduced con- ketplace. With these solutions, retailers can sumer spending overall. Some retailers better understand product mix, consumer have made significant, across-the-board preference and demand—and then take price cuts in response, which may be a good action based on their improved under- short-term survival strategy but can cause standing. long-term problems. In addition, while These advanced solutions also solve some private label brands have benefited many of the execution problems retailers from consumer bargain-hunting, their face, by sharing information from a com- increased roles in retail assortments could mon platform with an expanded range of add new complications to pricing calcula- internal business users, and automating tions and promotion management. pricing and promotion tasks that previous- Industry experts have identified just how ly required manual intervention. complex the issues around pricing can be. Pricing “is a critical tool retailers need to VIEWING PRICE MANAGEMENT entice share of wallet out of ever scarcer IN A LARGER CONTEXT consumers, while struggling to stay on top Given the new complexities of pricing, it’s of wildly fluctuating commodity and essential for retailers not to view it in isola- transportation costs,” write Nikki Baird tion. Too many other business processes are and Paula Rosenblum, Managing Partners affected, directly and indirectly, by pricing— at Retail Systems Research (RSR). “A rash from the deepest reaches of the supply chain of product discontinuations and introduc- all the way to the tags on the store shelf.

2 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | October 2009 In addition, pricing decisions can have Most retailers are all too aware of con- unintended consequences on shopper sumer price sensitivity. More than half— behavior. Some retailers who made signifi- 55%—of respondents to the 2009 RSR Pricing cant price cuts in response to the recession Benchmark Study listed “Increased price sen- found that their customers quickly became sitivity of consumers” as a top-three business accustomed to the new, lower prices, challenge, compared to 39% of respondents regarding them as the “new normal.” When to the previous year’s survey. these retailers tried to raise prices back to Many industry experts believe that for pric- previous levels, they encountered stiffer- ing and promotion management to be effec- than-usual resistance from shoppers. tive, it needs to be part of a strategic movement Short-term gains from lower prices may toward consumer-centric merchandising. This have cost these retailers customer loyalty in approach is designed to incorporate consumer the long term. demand across the entire retail merchandising A recent New Yorker cartoon commented function, from front-end space planning all on the retail pricing challenge. It shows the way back through the supply chain. This a store’s windows proclaiming “No holistic view of merchandising includes pro- Discounts! No Sales! All Merchandise Full viding executives with visibility into the myriad Price or Higher!”, with a passerby saying “I decisions being made simultaneously in mer- guess the economy is getting better.” chandising, including price, promotion, space

GROSS MARGIN AND CONSUMER PRICE SENSITIVITY TOP LIST OF BUSINESS CHALLENGES

Pressure to improve 73% bottom line (margin or profit)

Increased price sensitivity of consumers 55%

Tough economic conditions— consumers are spending less 47%

Pressure to improve top line (sales) 38%

Increased pricing aggressiveness from competitors 32%

Need to protect brand’s image 16%

Increased price transparency— the impact of comparative price shopping 15%

Source: RSR Research, January 2009

October 2009 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | 3 PRICE OPTIMIZATION AND PROMOTION MANAGEMENT: POWERFUL TOOLS FOR TOUGH TIMES AND BEYOND

allotments and assortments. to Achieving True Consumer-Centric In a May 2009 AMR Research article, Retailing,” AMR Research, May 2009.) Kevin Sterneckert, Retail Analyst at AMR Lifecycle price management, which Research, writes that a key element in mov- includes price and markdown optimiza- ing toward consumer-centric retailing is to tion, is both a key element within this larg- “Create a master plan that includes all of the er movement and an excellent place for opportunity points (e.g. advanced clustering, retailers to begin their overall efforts. For assortment planning, lifecycle price opti- starters, lifecycle price management offers mization, supply chain integration, etc.) and significant benefit opportunities, creating use this plan as a foundation for all related a fast ROI. Further consumer-centric ini- projects. It’s important to know where tiatives will be an easier “sell” to upper you’re going by defining an enterprise vision management if initial efforts can be shown of consumer-centric retailing.” (“A Path to pay off quickly.

BENEFITS CAN BE SUBSTANTIAL...

Lifecycle pricing benefit opportunities Initiative Cost Reduction Ad Response Rate Promotion Planning and 5% to 10% +6% to 8% Advertising Execution

Lifecycle pricing benefit opportunities

Initiative Sales Units Gross Margin

Price Determination/Revenue Optimization Base Price (non-promoted) +1% to 3% +0% to 1% +2% to 5% Promotional Prices +1% to 12% +1% to 9% +5% to 20% Markdowns +0% to 5% +5% to 10% +6% to 10%

Source: AMR Research, 2008

4 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | October 2009 According to AMR Research conducted ple, using the parameters above, a grocery in 2008, price determination/revenue opti- retailer with $2 billion in annual sales mization solutions can help retailers would see incremental sales increases of improve sales on base price (non-promot- anywhere between $20 million and $60 ed) items by 1% to 3%, and improve gross million annually, with gross margin dollars margins by 2% to 5%. On promotional increasing by between $20 million and $32 prices, sales increases can range from 1% to million annually (assuming average gross 12%, with gross margin improvements of margins of 20%). 5% to a high of 20%. Markdown sales can For a $5 billion hardlines retailer, the jump by up to 5%, and gross margins can incremental sales increases would range increase in the range of 6% to 10%. from $50 million to $150 million dollars Retailers implementing such solutions annually, with gross margin dollars would see significant benefits. As an exam- increasing by between $50 million and $81

OPPORTUNITIES FOR PRICING TO CONTRIBUTE TO STRATEGIC GOALS

Improve margins 78%

Drive traffic to our channels 38%

Create more profitable promotions 33%

Provide more control over inventory levels and movement 31% Increase market share for key categories or products 28%

Provide more localized prices and assortment based on customer segmentation 28% Improve our company’s ability 24% to use analytics for business decisions

Increase customer profitability 24%

Provide more personalized prices and assortment to individual customers 12%

Optimize inventory across channels 9%

Source: RSR Research, January 2009

October 2009 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | 5 cific (or even region-specific) variations that could potentially improve a promotion’s chances of success.

Practical execution concerns mean that key choices, such as which items to promote on the cover of a weekly circular and how large a discount to offer, must be executed on a chainwide basis— despite significant differences in shopper demographics and product prefer- PROMOTION MANAGEMENT ences in the many markets the retailer serves. In addition, many retailers lack SOLUTIONS IMPROVE SCALABILITY easy access to historical information about promotion performance, which AND SPECIFICITY is crucial to establishing a baseline for improvements.

As with pricing optimization, retailers Today’s promotion management solu- face both strategic and tactical chal- tions, such as those offered by SAP, lenges with promotions. And as with take multiple factors into account in pricing, promotions are most effective offering recommendations, including when they are carefully targeted. Well- manufacturers’ offerings and historical crafted promotions can achieve many performance. By bringing in shopper of the same benefits as price changes, behavior data, these solutions can not including increasing store traffic and only recommend which products to boosting unit sales, without the long- promote but also how much of a dis- term dangers of price-cutting. count will be effective in driving traffic. For example, retailers may discover “Successful promotional optimization that they can get the same promotion- stimulates consumer response by al lift by reducing the price of a box finding the right price for the right of cereal from $4.99 to $3.99 as they shopper segment in the right store, would have by reducing the price to requiring the appropriate blend of $3.49, thus improving their margin. science and art conducted in a time- In addition, advanced promotion efficient manner,” writes Kevin management solutions include “what- Sterneckert in “The Real Issue Behind if” scenarios that allow merchants to Promotion Optimization Adoption,” predict promotion performance. (AMR Research, February 2009.) In his article, Sterneckert identifies Easier said than done, particularly for key functional capabilities that retailers food retailers that may promote as should look for in a promotion many as 3,000 items per week. Without management solution: scalable solutions, item-level decisions • Start where you end today— become nearly impossible for most recommended promotional retailers to execute. In fact, many retail- items. Let the software and ers face challenges creating store-spe- science do the heavy lifting and

6 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | October 2009 million dollars annually (again, assuming Other important factors include general simplify the entire process. 20% average gross margins). economic conditions, as well as those in a • Include robust workflow/task Retailers believe pricing’s ability to particular region. Shoppers in a city with a management as well as improve margins is its key strategic role high unemployment rate, for example, are role-based activity management for their companies, according to a less likely to pay what they perceive as high and reporting. January 2009 RSR Research study. prices, even if they themselves are steadily • Demystify the black box “Improve margins” topped the list of employed. Weather can also play a role, (science). Merchants should be strategic opportunities for pricing, with both in terms of shopping patterns and in able to understand the reasons 78% of respondents. In comparison, the demand for specific products. behind a recommendation. second-highest response—pricing’s ability Advanced price optimization solutions • Don’t forget versioning to “drive traffic to our channels”—gar- use multiple factors to make price recom- optimization. True consumer- nered only 38% of survey respondents. mendations, and are capable of making centric merchandising suggests Pricing optimization that creates margin those recommendations down to the level that circulars should differ (items improvements can also impress decision- of an individual SKU. According to Neale, and prices by location or ad makers outside the retail organization. “A “These solutions take into account the zone). retailer’s gross margins on the products market, your competition, and the retail- • Integrate or include ad planning they sell is becoming an increasingly er’s own brand and assortment, as well as tools. important measurement area,” says Dr. service levels and store formats, the geo- • Have support for trade fund Wayne Neale, Vice President of Solution graphic area you’re operating in and the management (not manual entry). Management for Merchandising Lifecycle backdrop of the economy, and tell you • Include total business halo Solutions at SAP. “Ensuring that a retailer ‘Here’s what your customers are willing to and cannibalization impacts. is profitable on a product-by-product basis pay for this product right now.’” • Embrace customer is becoming just as much of a yardstick for The solutions are dynamic, taking into segmentation capabilities and Wall Street as same-store sales,” he adds. account time-based changes, the impact loyalty pricing. Price sensitivity is also an important lens of other prices within the same category, • Be sure to have e-commerce through which retailers can view their and promotional activity. The solutions capabilities for cross-channel shoppers—and seeing how that sensitivity apply precise, scientific analysis and make retail. shifts over time is a crucial step on the path recommendations on where, and how, • Ensure the single demand toward consumer-centric retailing. retailers can best implement their given engine receives signals and “Understand that reading and sensing con- price strategy. sends to the supply chain. sumer behaviors should become a ‘way of Price optimization solutions provide life’ and not a ‘point in time’ perspective,” retailers with a strong starting point both Promotion management solutions writes AMR Research’s Sterneckert. because they offer fast returns and incorporating these functionalities can “Consumers buy differently today than because they can start to shift the inter- help retailers address the increasingly they did just a few months ago.” nal culture within a retail organization. complex nature of promotions, which “Price optimization begins to get retailers require precisely timed actions by USING MULTIPLE DATA SOURCES familiar with the concept of science-driv- several departments within the retail AND DYNAMIC INTELLIGENCE en analysis informing the decisions organization as well as coordination TO SET PRICES they’re going to make,” notes Neale. “It with external suppliers. With such tools, Retailers need to move beyond the tradi- doesn’t replace the art of the retailer, retailers running thousands of promotional factors used to set prices—namely, including their knowledge of local mar- tions across many advertising zones their own costs and what their competi- kets and shoppers, but it supports the and geographies can reduce or elimi- tors charge for the same or similar prod- decisions they need to make.” nate the manual processes, wasted ucts. A retailer’s overall pricing strategy— On a practical basis, the automation time and inevitable miscommunications somewhere on the continuum between that price optimization solutions provide that make promotions such a challenge, Everyday Low Prices (EDLP) and Hi-Lo— is a necessity in today’s business environ- reaping both top- and bottom-line is of course a crucial strategic backdrop ment. “A retail merchant may have the benefits in the process. to any pricing decision. capacity to deal with only a few hundred

October 2009 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | 7 PRICE OPTIMIZATION AND PROMOTION MANAGEMENT: POWERFUL TOOLS FOR TOUGH TIMES AND BEYOND

products, but they may be responsible for price recommendations is just as impor- 10,000 products,” says Neale. “These tant as the recommendations themselves. solutions do the heavy lifting, but they But those execution capabilities are only make recommendations based on very now receiving sustained attention. solid scientific principles and analysis.” However, “with retailers starting to do In addition, many of the data sources things like setting caps on the number of and analyses used to make price recom- prices sent to stores per week because mendations are applicable in other key stores simply can’t keep up with the vol- retailing areas, such as assortment plan- ume, then it seems to me as if price execu- ning. And pricing decisions, particularly tion’s time is a bit overdue,” writes RSR’s those involving promotions and mark- Nikki Baird in “Oh, Just Give that Margin downs, will be affected by marketing and Away: The Price Execution Challenge,” will in turn have important impacts on (RSR Research, March 2009). areas such as labor scheduling, replenish- Retailers’ ability to transmit their price ment, allocation, and store operations. strategy to the shelf, and particularly into the minds of their shoppers, is crucial in ADDRESSING PRICING today’s marketplace. But there are several EXECUTION CHALLENGES practical hurdles to effective price execu- Retailers who have already invested in tion, including store training on pricing price optimization solutions have real- execution processes; developing and ized that their ability to execute on those enforcing price override policies; and com- municating prices. These three processes are all owned by different parties within a retailer; for example, marketing and/or merchandising typically owns price com- PREPARING FOR PRICE munication. In some organizations, responsibility is split even further, with OPTIMIZATION SOLUTIONS: merchandising owning price communication at the shelf while marketing owns FIVE KEY CONSIDERATIONS price communication beyond the store. Even in areas where there is a single “owner,” price execution processes can be 1. Because price optimization systems use item-level data as the cornerstone subject to conflicts or fall through the of price recommendations, ensure this data is accurate, with a process in cracks. For example, price overrides at the place for price zone execution. point of sale are frequently a result of training gaps in price execution at the 2. Consider using strategies that involve more than simply rules-based, linear shelf. Theoretically, store operations han- pricing models. dles training for both of these areas; in reality, in many retail enterprises cashier 3. Factor customer retention and growth into your strategic pricing plans. training is handled by a different set of Keep in mind that the circular motion of chasing competitors may not be in managers than store operations training. your customers’ best interests. Therefore, the link between at-shelf price execution and POS price overrides is 4. Make sure your merchants are focusing on strategic issues and not manip- never effectively made. ulating data. These challenges are only partly cultur- al and organizational; many are also driv- 5. Build a solid business case to validate price optimization’s benefits and to en by retailers’ IT architectures, which enhance organizational support. typically include a wide range of disparate systems, both off the shelf and home-

8 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | October 2009 grown, with siloed databases and costly Retailers can build up their capabilities point-to-point integration. In addition, on a module-by-module basis. “SAP has as retailers move from price optimization been known for 30-plus years as an inte- to promotion optimization, many under- grated platform, and this provides many lying technology conflicts come to the advantages to our customers,” says SAP’s surface. “Promotions touches merchan- Neale. “However, that is not a requirement dising, price, marketing/advertising, to run the applications. The applications POS, and loyalty—and each of the systems are able to operate on a common business supporting each of these functions may platform that allows them to share differ- very well provide price execution rules ent information, and the services-oriented engines, workflows, price masters, and architecture means the applications can more,” writes Baird. call on intelligence when they need it, but “Without an IT strategy to accompany the intelligence doesn’t have to be a part of the price strategy—i.e., how price strategy every single application.” through execution is going to be support- In fact, because the price optimization ed and enabled by information systems— and promotion management solutions are then any coordination or process work is completely integrated with more extensive going to be for naught,” she adds. business intelligence offerings from SAP BusinessObjects, they can easily address ADVANCED TOOLS OFFER the needs of many lines of business within VISIBILITY AND COORDINATION the retail organization. “We see our solu- CAPABILITIES tions in terms of business intelligence Price optimization and promotion man- opportunities,” says Russ Hill, Senior agement solutions from SAP can help Director for Retail, Consumer Goods, and retailers craft an IT strategy that supports Wholesale Distribution Global Marketing the advanced capabilities they need to com- for SAP BusinessObjects. “It’s not just pric- pete in today’s environment. Even for ing and store operations; we can spread to retailers who are just beginning to move the supply chain for the handling of pro- into these areas, SAP solutions offer a motional requirements, and look at “crawl, walk, then run” approach, starting demand for understanding the impact of slowly and then building. pricing relative to specific campaigns.” “We can quickly bring in the experience The solutions also deliver information in a we’ve had helping other retailers in areas number of different ways, expanding the such as customer profiling and campaign universe of users within the organization. management, and then help retailers “We can deliver information in the discovery, organize their own data, using best prac- search and explore mode, as well as through tices to get the core Key Performance roles-based dashboards and scorecards,” says Indicators together that they would need Hill. “That means we’re reaching all the way to analyze,” says Rob Wilson, Global from the C-level offices down to the business Director of Retail Solutions at SAP users. They all have the ability to understand, BusinessObjects. The company can also in near real-time, the impact of markdowns help retailers organize their data overall, as and promotional campaigns. They can seg- well as by business processes and by indi- ment the data by different store clusters, or viduals’ roles. “Retailers need to under- by product categories or departments, and stand what data people need and when the information can be rolled up through they need it in order for them to do their multiple levels—to a department manager, a jobs better and faster,” says Wilson. “We’re store manager, a district or regional manag- very skilled at diagnosing this and getting er, or even further.” the lay of the land.” Other new features include in-memory

October 2009 | PRICE OPTIMIZATION AND PROMOTION MANAGEMENT | 9 PRICE OPTIMIZATION AND PROMOTION MANAGEMENT: POWERFUL TOOLS FOR TOUGH TIMES AND BEYOND

technology, which allows users access to there and, maintaining the same view, multiple data sources comprising millions move into a tool where you can do an ad if not billions of records, but with extreme- hoc slice-and-dice or ‘what-if’ scenario ly fast response times. Queries that might around that particular intersection of data. have taken minutes or even hours with pre- “That’s only part of the process,” he vious technology are now virtually real- adds. “The collaboration aspect—the fact time interactions that allow users to “slice that you can email someone that exact view and dice” data on the fly. The capability is and they can then push it on to the next also largely self-service, requiring little or level or take action—is what puts this on no training and offering a Web-like experi- steroids. Everyone is operating off of the ence to users. same playbook, and this puts people into a The user interfaces may be simple, but whole new arena in terms of driving busi- the analytics powering the solution are ness and tightening up business cycle powerful and complex. “We offer deep, spe- times. People can make more rapid deci- cific applications and tools around pricing sions and adjustments on the fly, versus optimization, with very extensive algo- waiting until week’s or month’s end or rithms that are purpose-built for pricing until batch runs are completed.” optimization,” says Wilson. “Analysts can The combination of visibility and collab- use these powerful predictive analytics oration is a powerful one for retailers, par- engines to mine data, crunch it, and figure ticularly in the areas of pricing and promo- out what it’s telling them—and in the same tions, where each decision that’s made can platform, they can expose it out to casual cause ripples—and unintended conse- users or analysts who don’t require those quences—throughout the enterprise. kinds of ‘super-user’ capabilities.” “Everyone is on a common platform, with The solutions also encourage greater everyone seeing the same view,” says Hill. communication, providing the ability to “Even if they have different tools because export or email information in a number of their job requires a different level of analyt- different textual or graphic illustration for- ic horsepower, it’s all the same data, and mats directly to other business users. “All they can pass their perspectives to and fro. the tools work together, and all the data is And with a common business intelligence the same behind the scenes,” says Wilson. platform tied to the ways we deliver this “You could be in a dashboard that surfaces information, they can take that informa- key metrics and shows you how a recent tion and make it actionable.” ■ promotion performed. You can link from

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