PRICE WARS:

Special Report

How Retailers Can Compete With Unique Product Assortments & Customer-Segmented Promotions

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“PRICING is about trust. If customers trust you, the odds of them moving to competitors is much lower.”

- MATTHEW HAMORY, KPMG

Pricing continues to be a sensitive subject for both retailers and consumers. Can you blame either one? On one hand, retailers are struggling to figure out how to implement pricing strategies that can go head to head with big players like Amazon. On the other hand, consumers are savvy and capable of comparing prices on the spot, and they are always prepared to walk out of the store when they feel they can get a better price elsewhere.

In fact, studies show that consumers are more demanding than ever when it comes to prices:

Pricing drives purchases over brand loyalty:

of consumers said price is the most important factor when making purchases online.

Consumers will go out of their way for a better price:

of consumers are willing to travel to another store to see if they can buy an item at a cheaper price.

Women need markdowns to enter a store:

of women must see a markdown of 41% or more to even enter a store.

70+30z70%

39+61z39%

45+55z45%

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Given these consumer attitudes, what kinds of pricing strategies should retailers adopt? One is to consider maintaining consistent pricing across both online and in-store channels. Additionally, retailers need to keep consumers’ trust levels in mind.

“Pricing — from a customer perspective — is about trust,” said Matthew Hamory, Consumer & Retail Strategy Practice Lead for KPMG. “Not just with pricing, but all components such as service, quality, price and assortment. If they trust you then they’re not comparing everything. The odds of you having customers move to competitors is much lower.”

Many retailers need to repair the damage that previous pricing and promotion policies have caused, both to consumers’ trust levels and to their own bottom lines, according to a 2016 report from RSR Research, titled: Pricing 2016: Life Becomes Unmanageable.

“Retailers are engaged in a race to the bottom that very few can win,” said Paula Rosenblum, Managing Partner at RSR Research in a statement. “The blanket discounts they’ve been using for the past several years were intended to be last ditch efforts. Now customers are just trained to expect them all the time, and it’s completely blowing up in retailers’ faces.”

This special report uncovers how progressive retailers are staying afloat amidst a sea of price competition by:

Developing a clear value strategy for customers — through pricing, promotions and discounts — and tweaking the strategy with price optimization;

Enhancing product assortments, private label and services to deliver the value proposition for their customer base;

Leveraging customer and competitor data to deliver relevant promotions via price intelligence solutions; and

Measuring and testing pricing and promotion strategies to see what’s working and what isn’t.

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“Where we’ve seen PRICE OPTIMIZATION used well is in situations where the retailer has a very clearly defined value strategy for customers.”

- MATTHEW HAMORY, KPMG

Without A Value Strategy, Optimization Won’t Work

Prior to developing any kind of pricing strategy or implementing optimization solutions, retailers need to define a value strategy and market persona to better connect with shoppers. They need to assess who they are actually competing with and what category they fall under: price leader, category expert or premium play?

Once a value strategy is in place, that’s when retailers can implement optimization to tweak that strategy.

“Where we’ve seen price optimization used well is in situations where the retailer has a very clearly defined value strategy for customers — not just through price, but with promotions, discounts, etc., all elements of the price equation,” said Hamory. “Then they use optimization to tweak that strategy. When you don’t have that and put in an optimization approach that isn’t tightly tied and constrained by a strong customer focus strategy, you can get into trouble.”

Unique Product Assortments Can Trump Lower Prices

Experts agree that a highly effective way for retailers to use pricing is to incorporate it with other customer-facing elements, such as product assortments, services and experiences. Those will be the keys to competing with retail giants such as Amazon.

“Retailers can get in the trap of only thinking about price, and that can make them slip in terms of dropping levels of service, or not focusing on carrying the right product or what the right proposition is toward the customer,” said Hamory.

What can retailers, especially those with brick-and-mortar stores, offer that Amazon can’t? In a word, the shopping experience. Amazon may provide convenience and lower prices, but it can’t provide valuable, person-to-person services. It’s important not to lose sight of the reasons people shop with you, besides offering the lowest price for a product.

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“RETAILERS have to differentiate products. You need something that makes you unique, that will drive people to your e-Commerce web site or store.”

- JOE CALLAHAN, FIRST INSIGHT

Differentiating your product assortment from competitors — whether with exclusive product offerings or private label items — is also an effective way to compete.

“[A majority] of what you can buy at Macy’s can be purchased on Amazon,” said Joe Callahan, Sr. Director of Marketing at First Insight. “So you have to differentiate the products. Otherwise, Amazon can just duplicate anything at this point. You need something that makes you unique, that will drive people to your e-Commerce web site or brick-and-mortar store.”

For example, the hottest toys this past holiday season were Hatchimals. These toys were available at all major retailers, including Walmart, Toys “R” Us and Target. Instead of competing on price, each retailer offered an exclusive variety of Hatchimals toys. Target’s exclusive was the Bearakeet, the Toys “R” Us exclusive was the Owlcorn, while Walmart’s was the Burtle. With these exclusives, there was no need to go head to head on price.

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RETAILERS are often too dependent on pricing as a lever to improve performance.

- MIHIR KITTUR, UGAM

Price Intelligence, Dynamic Pricing, Price Optimization, Now What? The Road Ahead For Pricing In RetailBy: Mihir Kittur, Co-Founder and Chief Innovation Officer, Ugam

The future of pricing in retail looks bleak if retailers don’t make some significant changes to their pricing strategies in the near term. We’re going to continue to see confusion, unrealized (albeit partially) results and some champions.

Most retailers recognize that pricing is just one consideration in the overall proposition to the customer. However, retailers are often too dependent on pricing as a lever to improve performance, oftentimes making it “the ultimate consideration” for driving results. That can be a costly assumption.

According to PointofSale.com, 2016 was considered “the year of the promotion,” but the “rampant promotional and markdown activity led to a 24% margin reduction for North American retailers in 2016.”

Retailers are finding themselves in one of three states:

• They are confused about what to do next when putting a pricing strategy in place, as well as unrealized or partially realized results;

• They are unsure of where to implement technology to improve their pricing; or

• They are a champion with all the right pieces in place, and are seeing the results.

There is a big separation between the confused and the champions. If you are finding yourself in any of these states, there are ways to improve your status and become a champion.

PRICE COMPETITION AND TRANSPARENCY LEAD TO CONFUSION

There are several retailers who remain confused about their pricing strategy. What makes this even more difficult is the fact that many of them have not taken the time to understand the new omnichannel customer. These retailers are reacting to the competitive climate instead of planning for it. This is a short-term strategy without a long-term gain for the business. Retailers need a strategy that includes the right technology and the right process to support it.

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LEVERAGE TECHNOLOGY TO DEVELOP AN ORGANIZED PROCESS

Some retailers are making strides towards improvement by adopting price intelligence, dynamic pricing and price optimization technologies. However, there have been mixed results. Price intelligence has helped many retailers objectively understand customer choices and where they stand in the market. Many have acted upon the insight and used rules-based pricing on their key value items to protect revenue. Others have avoided implementing a dynamic pricing solution because of the complexity involved in implementing it. The same has happened with price optimization because of the long gestation period of implementation. This is a good first step, but these retailers need a more organized process to succeed.

THE CHAMPIONS

Retailers have defined improved business performance as they moved from cost plus to market reference and demand-driven pricing.

Here is what we have learned from our customers:

1. They are clear on what they intend to do with their pricing strategy.

2. They have the organizational structure to support this.

3. They believe in and use data and analytics to get there.

4. They have been patient with results (and made some mistakes).

5. They recognize that pricing is just one of the levers.

Relying on pricing as a primary lever to generate business results is very risky. Thus, to be a champion, a retailer must have a clear strategy, as well as the right structure, skills and some patience. It sounds simple, but it’s not easy.

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“Using MACHINE LEARNING, retailers can determine who their true competitors are and then be able to respond quicker.”

- CHERYL SULLIVAN, REVIONICS

Leverage Customer Data To Negotiate Promotions With Vendors

Retailers are enhancing promotional strategies to aim offers at narrower customer segments, according to a study from Revionics. The research showed that more than 50% are doing so to reach the right customer with relevant promotions at the right time.

“We like to believe that there won’t be an everyday price anymore,” said Cheryl Sullivan, Chief Marketing and Strategy Officer at Revionics. “When you’re dealing with a shopper that’s not loyal to anyone, and you don’t give them exactly what they want at a price they’re willing to pay, they move on.”

Sullivan said it’s important to bring machine learning science into the process in order to be able to understand the shopper in real time, as well as get a handle on the competitive market.

“Historically, some retailers would price against anyone,” said Sullivan. “That’s not necessary. Using machine learning, retailers can determine who their true competitors are and then be able to respond quicker.”

But when it comes to promotional strategies, it’s a slippery slope. When used properly, promotions can drive traffic to stores or e-Commerce web sites. “But if you rely on promotions too

much and you’re promoting everything, you get to a point where customers don’t trust your everyday prices,” said Hamory. “You’re risking undermining your customer’s trust in your basic value proposition.”

This is where segmentation, and leveraging customer and competitor data via a price intelligence solution, can help. In addition to making the promotions themselves more effective, retailers can use customer insights to gain leverage in their dealings with vendors. “If you’re a retailer and not well equipped in negotiating and understanding the impact of promotions, you’re at a disadvantage,” said Hamory.

“But if you can arm your merchant with good information about what works for your business and matters to your customer, you can make sure you focus promotions in the right areas,” he continued. “The worst thing [retailers] can do is promote things people don’t care about. It’s better to put [the promotion] in a place where customers care and you are giving them value they want.”

In conclusion, while price may always be an important factor, it doesn’t necessarily make or break a brand. By staying true to value propositions and offering unique product assortments, retailers can earn consumers’ trust and compete against the greats. After all, an exceptional customer experience is priceless.

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Case In Point: How Build.com Competes Beyond Price

Build.com is an online pure-play home improvement retailer that wanted to compete in this $400 billion market. But the company’s pricing visibility was limited to the category level, which resulted in sub-optimal decisions.

The retailer turned to 360pi price intelligence solutions to help identify pricing opportunities at the individual SKU level. 360pi can monitor pricing for more than a billion combinations of products, categories and competitors. Now Build.com is able to:

• Understand which SKU sales volumes affect price changes;

• See real-time whole pricing information, including shipping availability; and

• Realize competitive insights beyond pricing, such as assortment opportunities and manufacturer price promotions.

“Having the price intelligence allows us to react more quickly and allows us to enact our own pricing strategies,” said Devin Van Hout, Chief Merchant for Build.com. “It also allows us to get some insight on potential areas where we’re not buying as well as some competitors, or seeing where our competitors are actually focusing in the market. Having the price intelligence data has allowed us to build out the price elasticity for specific SKUs, so we know — whether or not a competitor makes a change — if we should follow suit or not. You don’t always have to be the lowest price based on the service and level of the offer.”

Watch this video to hear more about how Build.com was able to compete in the home improvement market.

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Tips To Test And Measure Pricing Strategies

A successful pricing and promotions strategy is of little value if it isn’t being analyzed. Pricing can’t be effective with a “set it and forget it” mindset. Retailers must assess what’s working and what isn’t on a regular basis. Industry experts shared tips on how to successfully test and measure pricing strategies:

“Figure out who you’re competing with and benchmark based on your pricing and assortment. Figure out what the shoppers you’re going after are actually looking for — look at the space. Are you carrying what they’re carrying? Should you be? Where is the white space for you? What are the price bands to upgrade? That’s the starting point.”

–JENN MARKEY, 360PI

“Any time you make a change, you have the opportunity to measure and understand what has happened. Review your strategy at the end of the quarter or period. What did you see in stores when the prices changed? Make sure you go back and evaluate that. That should be a function in various parts of the business. Go back and see what you did and what happened. Once you put that discipline in place, there’s a lot you can do.”

- MATTHEW HAMORY, KPMG

“Be deliberate with your testing programs. Then you’ll notice what fails, because you’re touching edges and figuring out what works and what doesn’t. With so many touch points, it’s difficult to design a clean test. To be effective, you have to have that deliberate piece.”

- GREG PORTELL, A.T. KEARNEY

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Ugam is a global leader in managed analytics that helps retailers and brands transform big data into valuable insights. The company’s unique managed services offering combines a proprietary big data technology platform with deep domain knowledge and analytics expertise to empower clients to make decisions that improve their business.

www.ugamsolutions.com

Retail TouchPoints is an online publishing network for retail executives, with content focused on optimizing the customer experience across all channels. The Retail TouchPoints network is comprised of a weekly newsletter, special reports, web seminars, exclusive benchmark research, an insightful editorial blog, and a content-rich web site featuring daily news updates and multi-media interviews at www.retailtouchpoints.com. The Retail TouchPoints team also interacts with social media communities via Facebook, Twitter and LinkedIn.

KLAUDIA TIRICO Features Editor

Retail & B2B marketing writer, Jersey dweller, animal lover, fashion + beauty aficionado and obsessive shopper still waiting for her Hogwarts acceptance letter.

Read more from Klaudia.1.888.603.3626 info@retailtouchpoints.com