2014 pricing paradox rsr

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The Pricing Paradox Benchmark Report 2014 Brian Kilcourse and Paula Rosenblum, Managing Partners

April 2014

Sponsored by:

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Executive Summary

Retailers have been along for a rough ride over the last seven years, and nowhere has this been reflected more strongly than in their price strategies. Between the rise of smartphones and transparency, the economic downturn, and a certain amount of promotional fever, retailers have had to assimilate a lot of change in a short amount of time. In this, our 7th annual benchmark on the state of Pricing in Retail, we wanted to find out exactly how well retailers are responding to their pricing challenges, and which new challenges loom ahead.

Key Findings Overall, retailers appear to be moving away from defining a price strategy in response to

competitive pressures, and moving more towards concerns over what their past pricing behavior has done to their brand image. However, despite these rising concerns, consumer price sensitivity continues to dominate the pricing challenges of retailers of all stripes and sizes. We examine what both of these trends mean in the Business Challenges section of this report.

Improving margin remains the top pricing opportunity for retailers. But while laggards are locked on keeping up with the competition, Winners appear to be moving away from that focus to look more closely at pricing's impact on their brand image. Explore more of the stark differences Winners and laggards see for pricing in the Opportunities section.

In 2013, retailers reported very little understanding of the impact of their pricing decisions, whether measuring decisions already made, or forecasting the impact of future decisions. Retail Winners appear to have significantly addressed this issue in the intervening year. But that has led them to a significantly increased concern over competitive intelligence, along with a desire to build up more sophisticated pricing capabilities over time. Are we entering a new renaissance around price? We examine this question within Organizational Inhibitors.

Competitors' prices top even customer purchase history as data elements that retailers value in their price strategy. However, despite the conflicting focus on improving margin, versus the importance that retailers place on competitive prices and promotions as a major price strategy, retailers are still making significant progress in implementing solutions across the pricing lifecycle. Find out which are in play and which should be in the Technology Enablers section.

Throughout the years that we have tracked the progress of retailers' pricing strategies and the solutions that support them, we have seen a remarkable evolution from pricing solution as differentiator to pricing solution as ante to the game. However, what that means is that the future will not be won by having solutions so much as in how retailers use them. To that end, well offer several in-depth and pragmatic suggestions on how retailers should proceed. These recommendations can be found in the Bootstrap Recommendations portion of the report.

We certainly hope you enjoy it,

Brian Kilcourse and Paula Rosenblum RSR Research

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Table of Contents Executive Summary ......................................................................................................................... i Research Overview ......................................................................................................................... 1

Defining Retail Winners, and Understanding Why They Win ...................................................... 3 Methodology ................................................................................................................................ 3 Survey Respondent Characteristics ............................................................................................ 3

Business Challenges ....................................................................................................................... 5 Consumer Price Sensitivity, Brand, Channel Consistency .......................................................... 5 Channel Proliferation: Does It Drive Strategic Change? .............................................................. 6

Opportunities ................................................................................................................................... 8 On The Surface, Unsurprising and Consistent With Prior Years ................................................. 8 Winners See Diverse Opportunities, Laggards Focused On A Few ............................................ 8 Opportunities Missed And Processes Lagging ............................................................................ 9

Organizational Inhibitors ................................................................................................................ 11 New Obstacles, And Some Old Ones ........................................................................................ 11 Operational Challenges Shift ..................................................................................................... 13 Overcoming Inhibitors: Different Strokes ................................................................................... 14 The Value Of Leadership ........................................................................................................... 15 What It Means ............................................................................................................................ 16

Technology Enablers ..................................................................................................................... 17 The Pendulum Swings (A Little) ................................................................................................ 17 Its A Journey ............................................................................................................................. 19 A Challenge And An Opportunity ............................................................................................... 20 The Optimized Advantage ......................................................................................................... 21 Cloudy Prospects ....................................................................................................................... 22 Technology Wrap-up ................................................................................................................. 23

BOOTstrap Recommendations ..................................................................................................... 24 Its Easy To Go Down Market (But Hard To Get Back Up Again) ............................................. 24

Resisting Discounting's Siren Call ......................................................................................... 24 Forecast And Measure .............................................................................................................. 24

Measure the Impact of Price Changes ................................................................................... 24 Use Optimization Science To Achieve Your Goals .................................................................... 25 Leadership - And A Strategy ...................................................................................................... 25 Don't Ignore The Lifecycle ......................................................................................................... 25 Move Towards Precision Marketing & Pricing ........................................................................... 25

Appendix A: RSRs BOOT MethodologySM ..................................................................................... a Appendix B: About Our Sponsors ................................................................................................... b Appendix C: About RSR Research ................................................................................................. c

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Figures Figure 1: The United States Driving Promotional Fever .................................................................. 1

Figure 2: Objectives Are Straightforward and Clear .................................................................... 2

Figure 3: Results, Not So Much ................................................................................................... 2

Figure 4: Dancing Faster and Faster ............................................................................................... 3

Figure 5: Overall, Focus Is Between Retailers and Consumers, Not Competitors .......................... 5

Figure 6: A Prime Example of the Difference Between Winners and Laggards .............................. 6

Figure 7: Zone Pricing Mostly Co-existing With Price Transparency .............................................. 6

Figure 8: But Channel Proliferation Is Definitely Driving Change .................................................... 7

Figure 9: In Aggregate, Opportunities Align With Objectives .......................................................... 8

Figure 10: Winners See Diverse Opportunities, Laggards See A Few ........................................... 9

Figure 11: Flying Blind Far More Than We Should ....................................................................... 10

Figure 12: New Obstacles Top The Old Ones .............................................................................. 11

Figure 13: Granularity Is No Longer A Problem ............................................................................ 12

Figure 14: Strategy vs. Execution ................................................................................................. 13

Figure 15: Competition Is Tougher ................................................................................................ 14

Figure 16: Technology Or People ................................................................................................. 15

Figure 17: Show Me The Way ....................................................................................................... 16

Figure 18: Running In Place .......................................................................................................... 17

Figure 19: Close Alignment ........................................................................................................... 18

Figure 20: Still More Upside .......................................................................................................... 19

Figure 21: Nattering Naysayers Of Negativism ............................................................................. 20

Figure 22: Competitive Data Feeds To Price Optimization ........................................................... 21

Figure 23: More ............................................................................................................................. 22

Figure 24: Hard Sell ...................................................................................................................... 23

1

Research Overview

Welcome to RSRs seventh annual retail Pricing Benchmark. Over these past seven years weve seen some tumultuous changes in the retail industry. Those in turn have driven changes in pricing practices. Our first benchmark on the topic was published in January 2008, just a few months after the introduction of the iPhone in June 2007, and nine months before the dramatic onset of the Great Recession in October of 2008. By the end of that year, the day-to-day impact of the Great Recession was seen in pricing, as shoppers went into hiding and retailers were forced to take dramatic markdowns to clear unanticipated excess inventory.

Just when we thought pricing practices were Getting Back to Good (the title of our 2010 benchmark), it became apparent the iPhone and other smartphones that followed were going to disrupt the industry again. Price transparency, driven by consumer smartphone adoption, became an industry mantra, and the word showrooming entered retails lexicon. In fact our 2011 report was named Optimizing Price in a Transparent World to reflect just this awareness.

For the past two years, at least in the US, the retail industry has been in the grips of what can only be called promotional fever, most especially around the Thanksgiving weekend and the all-important holiday season. This year, we had a particularly interesting opportunity to contrast pricing practices between the United States and another country, the United Kingdom. Our retail respondents report that while the number of price changes continues to rise everywhere, promotional activities are far more prevalent in the United States (Figure 1).

Figure 1: The United States Driv ing Promotional Fever

Source: RSR Research, April 2014

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We have become more luxury focused

We have become more seasonal driven

We have become more discount focused

We have become more focused on everyday low prices

Our strategy has not changed

We have become more focused on key items

We have become more promotions driven

How Has Your Pricing Strategy Changed in the Past Three Years?

US UK

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This has led us to confront an essential Retail Paradox: even though retailers have reported the primary objective of pricing strategies is to maximize gross margin (Figure 2), their actions seem destined to drive gross margin down, rather than up, in the hopes of increasing market share and driving demand.

Figure 2: Object ives Are Straightforward and Clear


The obvious follow-on question is, How well is that working for you? As we can see from Figure 3, retailer confidence in their strategies and tactics is lukewarm.

Figure 3: Results , Not So Much


And still the volume of price changes continues to rise. While the pace of increase seems, at least on the surface, to be stabilizing, the fact remains that 55% of our respondents continue to increase the volume of prices changes sent to stores and other channels (Figure 4).

8%

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46%

To liquidate merchandise at end of life

Price is not our primary driver

To improve merchandise sell-through

To create excitement for our brand

To stave off competitive pressures

To convey value proposition

To drive demand

To build market share

To maximize gross margin

Top Three Objectives of Pricing Strategy

27%

62%

11%

Very effective Somewhat effective Not effective at all

How Effective Are Your Pricing Strategies in Driving Top and Bottom Line Results?

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Figure 4: Dancing Faster and Faster


We see this trend regardless of retailer performance. The only observation we can make is that Retail Winners report they have been more successful in continuing to improve selling gross margin while jiggering prices. Still, it cant go on like this forever. Sooner or later, the industry must shift to fewer, more strategic price changes. Later in this report, well see why: price changes impact operations.

Defining Retail Winners, and Understanding Why They Win RSRs definition of Retail Winners is straightforward. We judge retailers by year-over-year comparable store/channel sales improvements. Assuming industry average comparable store/channel sales growth of three percent, we define those with sales above this hurdle as Winners, those at this sales growth rate as average, and those below this sales growth rate as laggards or also-rans.

It is consistent throughout much of RSRs research findings that Winners dont merely do the same things better, they also tend to do different things. They think differently. They plan differently. They respond differently. Throughout this report well highlight significant differences between Winners and laggards. These differences are often not subtle at all.

Methodology RSR uses its own model, called the BOOT MethodologySM, to analyze Retail Industry issues. We build this model with our survey instruments. See Appendix A for a full explanation.

In our surveys, we continue to find differences in the thought processes, actions, and decisions made by retailers who outperform their competitors and the industry at large. At root, thats what makes them Retail Winners. The BOOT helps us better understand the behavioral and technological differences that drive sustainable sales improvements and successful execution of brand vision.

Survey Respondent Characteristics RSR conducted an online survey from January-March 2014 and received answers from 110 qualified retail respondents. Respondent demographics are as follows:

21% 34%

42%

3%

41% 35%

21%

3%

Increased significantly Somewhat increased Stayed about the same Decreased

How Has the Volume of Price Changes Sent to Stores and Other Channels Changed Over the Past

Three Years?

2014 2013

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Job Title: Executive/Senior Management (C-level or VP) 18% Middle Management (VP/Director, Manager) 33% Individual Contributor and Other 50%

Functional Area of Responsibility: Executive Team 10% Merchandising 9% Customer Experience 9% Marketing 10% Pricing 6% Store Operations 22% eCommerce / Direct Operations 4% Supply Chain 9% Finance & LP 10% IT 12%

2013 Revenue (US$ Equivalent)

Less than $250 Million 29% $250 - $499 Million 12% $500 - $999 Million 16% $1 - $5 Billion 16% Over $5 Billion 27%

Products sold:

Fashion / Short Lifecycle 9% Seasonal 15% Basics/Replenished Items 31% Durable Goods 22% Consumer Electronics 14% Perishable / Food 10%

Headquarters/Retail Presence:

USA 30% 51% Canada 1% 28% Latin America 1% 20% UK 53% 71% Europe 10% 39% Middle East 1% 23% Africa 1% 15% Asia/Pacific 3% 29%

Year-Over-Year Sales Growth Rates (assume average growth of 3%):

Better than average (Retail Winners) 31% Average 52% Worse than average (Laggards) 17%

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Business Challenges

Consumer Price Sensitivity, Brand, Channel Consistency Consumer price sensitivity remains the most frequently cited top-three Pricing business challenge. However, weve also seen increased concerns about brand price image and cross-channel consistency. Its interesting that these concerns rise at the expense of competitive worries. In other words, in aggregate, it seems retailers fret about the impact of the things they do on their relationship with consumers, rather than their competitors responses (Figure 5). This data is consistent across revenue band and geographies.

Figure 5: Overal l , Focus Is Between Retai lers and Consumers, Not Competitors


The story changes quite a bit when we look at responses based on retailer performance, however.

It has become a truism in RSRs research that Retail Winners tend to look within, or to their customers, for sources of both opportunity and concern. It has also become a truism that laggards are always looking over their shoulders. This benchmark is no exception.

As we can see in Figure 6 below, when forced to play lifeboat and select their primary concerns, once we get past consumer price sensitivity (where concerns are roughly equal for all respondents), for laggards, its all about their competitors. And for Retail Winners, its all about a better face to consumers.

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57%

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Respond to segment blurring (competition coming from unexpected places)

Need to provide more localized pricing

Increased price transparency the impact of comparative price shopping

Need to get better return on our inventory investment through pricing

Increased promotional intensity of competitors

Increased pricing aggressiveness from competitors

Need to provide consistency in price across channels

Need to protect our brands price image

Increased price sensitivity of consumers

Top Three Strategic Pricing Business Challenges

2014 2013

6

Figure 6: A Pr ime Example of the Difference Between Winners and Laggards


The difference could not be starker. laggards overwhelmingly cite competitive issues, while Retailer Winners worry about their brand image and consistency across channels.

Channel Proliferation: Does It Drive Strategic Change? We live in an age when new selling and product information channels seem to spring up, literally overnight. We would therefore expect retailers to shift their pricing strategies in one way or another. Early on we predicted an end to zone pricing, as an immediate byproduct. It turns out this is mostly not the case (Figure 7).

Figure 7: Zone Pr ic ing Most ly Co-exist ing With Pr ice Transparency

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Respond to segment blurring (competition coming from unexpected places)

Need to get better return on our inventory investment through pricing

Increased pricing aggressiveness from competitors

Need to provide more localized pricing

Increased promotional intensity of competitors

Increased price transparency the impact of comparative price shopping

Need to provide consistency in price across channels

Need to protect our brands price image

Increased price sensitivity of consumers

Top Three Strategic Business Challenges: Performance Differences

Retail Winners Laggards

22% 25%

15%

Laggards Average Performers Retail Winners

Zone Pricing Plans Have Been Damaged "Agree"

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Instead, other challenges have emerged, and retailers have responded differently, depending on their going-in strategy, and depending on performance. Most disconcerting to us is that 50% of laggards have said channel proliferation has had NO impact on their Pricing Strategy (Figure 8).

Figure 8: But Channel Prol i ferat ion Is Def in ite ly Driv ing Change


We also confess to a certain amount of surprise at the way Retailer Winners have responded. Theyre actually leveraging different channels in different ways, with only 9% aligning web and store-based pricing. Clearly the strategies are working.

Those laggards who have responded to channel proliferation (again, only 50% acknowledge any change at all), are most likely to just return to one price everywhere. This has proven to be an ineffective response. Retail Winners apparently have it right.

We were especially surprised to find that 68% of retailers selling basic, replenishable items report channel proliferation having no impact on their pricing strategies. We would have expected the looming presence of Amazon.com to drive these retailers to change sooner, rather than later. But they have stood pat. They worry and create a lot of buzz around Amazon.com, but dont necessarily respond.

Next, well take a look at the opportunities retailers perceive coming out of these business challenges.

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Returned to one price

Zone pricing can't be implemented because of channel conflicts

We align store zone pricing with regional or zone-based web pricing

Web as lowest price

Channel-specific promotions

Channel-specific pricing (web-only or store-only)

No impact

How Has Channel Proliferation Impacted Your Pricing Strategy?


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Opportunities

On The Surface, Unsurprising and Consistent With Prior Years In general, opportunities are in line with corporate objectives for pricing as a lever, and also match up well with prior years (Figure 9).

Figure 9: In Aggregate, Opportunit ies Al ign With Object ives


The only year we saw a switch between margin and top-line sales as the most frequently cited top-three opportunity was immediately after the Great Recession, in 2010. At that time, retailers were willing to try most anything to get customers back into their stores and onto their web sites. Now, in that most exquisite of paradoxes, retailers appear to favor price strategies that are designed to maximize gross margin, even as the end result appears to be depressing that margin.

However, when we dig into the details of Winners vs. laggards, a very different story emerges.

Winners See Diverse Opportunities, Laggards Focused On A Few As we can see below in Figure 10, once we move beyond the maximized margin opportunity, Winners have no clear consensus on what they can reap from their pricing strategies. Laggards

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Gain margin advantage through more dynamic pricing

Provide more localized offerings to customers

Create more profitable promotions

Increase market share for key categories or products

Provide a more seamless cross-channel experience to customers

Better matching of demand and product supply

Create a more price competitive image for our customers

Improve top-line sales

Improve margins

Top Three Opportunities for Pricing to Contribute to Business Strategy in the Next Two Years

2014 2013

9

on the other hand are focused: theyve got to satisfy investors and shareholders by improving top-line sales and making sense out of their promotions. For them, in some ways, the Great Recession lives on.

Figure 10: Winners See Diverse Opportunit ies , Laggards See A Few


We find it fascinating that Retail Winners, who are more apt to create channel-specific pricing and promotions than laggards, focus so much on providing a more seamless cross-channel experience to customers. This was also the case in 2013, so its clearly a trend, rather than a single year anomaly. Its also a paradox that frankly challenges logic. We remain concerned that rather than just being a paradox, its simply an inconsistent set of perspectives that will ultimately come back to haunt them. There is nothing seamless about different pricing between on-line and stores, and nothing more frustrating than having a consumer point that out to you. Its worrisome and, in our view, unsustainable.

Opportunities Missed And Processes Lagging We asked our retail respondents to voice their opinions on a variety of current and near-term process and promotion opportunities. In general, responses mimicked sentiment voiced in other parts of the survey, but differences between Winners and laggards are interesting and worth calling out (Figure 11, below).

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59%

Gain margin advantage through more dynamic pricing

Provide more localized offerings to customers

Create more profitable promotions

Improve top-line sales

Provide a more seamless cross-channel experience to customers

Improve margins

Top Three Opportunities - Winners vs. Laggards


10

Figure 11: F ly ing Bl ind Far More Than We Should


On the one hand, a quick scan of the chart tells us that Retail Winners are doing a far better job taking advantage of the opportunities they see than their peers, but in fact, theyre just doing a less bad job.

For example, the good news is 65% of Retail Winners agree that they have the ability to respond quickly to competitors price changes. Yet that also tells us 35% do not have that ability. Of course, contrasted with the 56% of laggards that dont have that ability, theyre doing well. But in a hyper-promotional environment, its critical to respond quickly. The same could be said about both promotional planning across organizations and promotional effectiveness. Twenty-nine percent of Retail Winners are not confident that their promotions are effective. Yet they run more promotions and generate more price changes than their peers, and certainly more than ever before.

This begs the question: whats standing in the way of getting their houses in order? And to answer that question, we must take a look at Organizational Inhibitors, the internal challenges that get in their way.

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65%

My company currently targets our promotions at the appropriate level of granularity.

It will become important to deliver personalized prices to shoppers within the next three years

We are collecting data from new channel promotions and are using them to make better

decisions

Dynamic pricing is more effective than price matching

My company feels confident that our promotions are effective overall

We have processes in place to manage promotional planning across the various

organizations within our company

We have the ability to respond quickly to competitors' price changes

Pricing Capabilities: "Agree"


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Organizational Inhibitors

New Obstacles, And Some Old Ones When describing the steps of RSRs BOOT MethodologySM, we often refer to the 2nd O (Organizational Inhibitors) as the enemies within. For pricing, that has certainly been the case in the past. In last years report, we highlighted the top inhibitors: The need to get clean data on past prices, competitor prices and customer purchase data. Stores and other channels becoming more resistant to change. A lack of skill sets. While those obstacles are still top inhibitors for about one-third of our respondents, two new problems have pushed their way to the forefront (Figure 12): difficulty getting to the top of the IT priority list (an internal inhibitor), and a growing concern about negative consumer reaction to changes in the pricing strategy (an external inhibitor).

Figure 12: New Obstacles Top The Old Ones


Concern over customer reaction is consistent with retailers top stated business challenge, that consumers are increasingly sensitive to price. Both the business challenge and the inhibitor are reflective of an underlying truth in retailing today: the consumer is in control. With access to anytime/anywhere information via their mobile devices, consumers have unprecedented visibility into product and pricing information, and they are using it to make the smartest shopping decisions. This new reality is driving virtually every aspect of retailing today, including pricing.

Retailers continue to have their own internal challenges to contend with, but some things have improved. For example, resistance to change from the Stores has lost some of its significance, and the ability to manage prices at a more granular level has dropped in significance more than

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N/A

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We cant execute at the level of granularity that pricing solutions provide

Our channel organizational structure makes it difficult to coordinate pricing strategies across

Resistance to change from Merchandising

Lack of coordination with Marketing

Resistance to change from Stores or other channels

Lack of the right skill sets

Lack of clean price, competitor and purchase data

The possibility of negative customer reaction to changes in our pricing strategy

Conflicting IT priorities for newer solutions

Top Three Organizational Inhibitors

2014 2013

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any other factor over the past few years, as retailers have learned how to use their pricing skills to better effect (Figure 13).

Figure 13: Granular i ty Is No Longer A Problem


On the other hand, lack of clean price, competitor, and purchase data has remained a nagging and consistent problem a concern for Winners more than their lesser-performing competition, as well see in a moment.

The choice of conflicting IT priorities as the TOP inhibitor is perhaps a surprise, but it is consistent with other recent benchmark studies that we have conducted. For example, in our February 2014 study on Mobile In Retail, we discovered that Budgeting and ROI challenges was the top inhibitor to implementing a mobile strategy, while our January 2014 study on Retail Analytics found that budgetary constraints stand in the way of implementation of new business analytics tools and processes for one-third of respondents to that study. But in looking at this study through the lens of performance, we see that the IT issue is primarily a problem for laggards (Figure 14, below).

Beyond IT Priorities we see a much bigger issue for laggards: they seem stuck many of them dont seem to have a strategy for meeting their pricing objectives. Instead, they worry that their customers will revolt against changes in pricing strategies, and use the excuse of conflicting IT priorities to justify lack of progress. Winners are worried about inhibitors that impede implementation of a strategy, rather than the lack of one. While they are not immune to IT priority conflicts, the lack of clean data is the top inhibitor, and other tactical considerations such as channel coordination, skill sets, and organizational resistance from Marketing and Stores, follow close behind. These are all tactical issues.

The lesson for laggards is almost prosaic: if you dont know where youre going, you probably wont get there.

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The possibility of negative customer

reaction to changes in our pricing strategy

Resistance to change from

Merchandising


Lack of coordination with

Marketing

We cant execute at the level of

granularity that pricing solutions

provide

Top Organizational Inhibitors: Trends

2012 2013 2014

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Figure 14: Strategy vs . Execut ion


Operational Challenges Shift In our 2013 benchmark, we noted:

How can it be that we continue to increase the number of price changes we send, we rely on pricing to manage our margin and top lines, and yet almost half of us report we can neither forecast what impact potential pricing decisions will have, nor can we measure the actual impact those decisions have?

The question was a reflection of the responses to that study; forecasting the impact of potential pricing decisions and measuring the impact of executed pricing decisions were the two top operational challenges for almost half of the retailers surveyed.

This years study shows quite a change at least when it comes to those issues. Winners in particular report that forecasting the impact of potential pricing decisions and measuring the impact of executed pricing decisions are less of a challenge this year than last (Figure 15, below).

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We cant execute at the level of granularity that pricing solutions provide

Lack of coordination with Marketing

Resistance to change from Stores or other channels

Resistance to change from Merchandising

Lack of the right skill sets

The possibility of negative customer reaction to changes in our pricing strategy

Conflicting IT priorities for newer solutions

Our channel organizational structure makes it difficult to coordinate pricing strategies across channels


Inhibitors: Winners vs. Laggards


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Figure 15: Competit ion Is Tougher


But for Winners, the new #1 operational challenge is keeping up with competitors prices, even when most say that they are getting access to robust competitive price data. This may be a reaction to e-marketplaces like Amazon, or retailers price matching promise to consumers (most recently exemplified by Walmarts competitive price check "Savings Catcher" website).

Overcoming Inhibitors: Different Strokes We mentioned in the Overview section of this report that the US retail industry stands out as being particularly gripped by promotional fever, as evidenced by how US retailers responded to the question How has your pricing strategy changed in the past 3 years?, compared to UK retailers. More than twice as many UK retailers as their US counterparts make the claim that their pricing strategy has not changed (29% vs.13%), whereas over 2X as many US retailers say that they have become more promotionally driven (44% vs.17%).

These market differences drive how retailers address inhibitors. Almost as if living up to the stereotype, US retailers show a preference for solving problems with technology. Since they put so much emphasis on promotions, US retailers want more sophistication in their pricing capabilities, and better integration technologies that glean information from operational systems to address the need for clean data (Figure 16, below). UK retailers on the other hand favor a focus on the human element improving skill sets and better communications to resistant parties.

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Inability to effectively manage all pricing rules and/or understand impact of rule violations

Keeping up with promotional deals cut by buyers with manufacturers

Getting access to robust competitive price data

Keeping up with pricing and packaging changes by manufacturers

Making sure that stores change prices accurately and timely

Managing promotions across channels

Minimizing markdown spend

Measuring the impact of executed pricing decisions

Forecasting the impact of potential pricing decisions

Coordinating with marketing on promotions and offers

Maintaining visibility into promotional profitability

Keeping up with competitors' prices

Operational Challenges

Winners Laggards

15

And while UK retailers want better technologies to support their pricing strategies, they are willing to take on the potentially time-consuming task of tailoring the technologies to meet their proprietary needs.

Figure 16: Technology Or People


The Value Of Leadership Beyond market differences that determine how retailers address inhibitors, the responses to this study also show how important leadership is if only by virtue of its absence. As noted earlier, many laggards seem to lack a strategy when it comes to pricing. They fear a negative consumer response to changes in their current practices, and they tend to use the convenient excuse of too many other IT priorities to justify inaction. But that doesnt mean that they dont see the need to move forward. It more likely means that they dont have the vision. And so, laggards place most importance on strong business leadership to overcome inhibitors (Figure 17, below).

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Best practices for managing channel conflict of prices

Pilot programs in specific stores or regions

Line of business leaders to help change our business processes

Better training to improve pricing skill sets

Tailor a technology solution to my business process and needs

Better communication and education of resistant parties or organizations

Business process analysis for pricing process improvement

Improved integration technology tools

Build up progressively more sophisticated pricing capabilities over time

Overcoming Inhibitors

US UK

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Figure 17: Show Me The Way


Most Winners dont need someone to point the way they probably already have strong leaders, and a strategy to get behind. What they see as important is a process of continuous improvement over time, supported by good information and technology-enabled capabilities.

What It Means This examination of the enemies within points to several important differences between over- and under-performers. Clearly, more Winners than laggards have strategies in place to address market challenges while at the same time reach for their top objective to improve overall gross margins. That in turn implies that the business leadership of those companies is driving that focus. These are both critical success factors that laggards need to emulate. Winners are moving ahead with continuous improvements to their capabilities, while laggards continue to struggle with forecasting the effects of proposed plans or in measuring the effect of executed plans that needs to change. And retailers across all cuts need to improve the integration between their operational systems, so that they will have better data to work with.

But even Winners, with all the leadership, strategy, and capabilities that they have working for them, are struggling within the grip of the promotional fever in the marketplace (especially in the US). As we stated in the Overview, sooner or later, the industry must shift to fewer, more strategic price changes.

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Technology Enablers

The Pendulum Swings (A Little) RSRs 2013 Pricing benchmark reported that:

Clean demand at a store level, competitors' prices, and clean promotion history remain at the top of the list, but almost everything based on customer in some way jumped significantly Customer purchase history shot to the top 5 on the list, moving from 37% of respondents who rated it as very valuable in 2012, to 54% in 2013. Even customer sentiment gathered from social media benefited - improving from 17% in 2012 to 25% this year.

What a difference a year makes in the harsh competitive post-Recession climate! In the Organizational Inhibitors section above, we discussed the difficulty even Retail Winners face in keeping up with competitors prices. Its no surprise then that the top-rated data element ranked very valuable in this study is competitors prices (Figure 18).

Figure 18: Running In Place


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Competitive price data has risen in importance as retailers try to win consumers over with more bargains. Consumer demographic data has also grown in importance while customer segmentation data has remained level. These data are hardly new, having been in use since the early days of category management and price optimization. But it is indicative of the fact that retailers are finding themselves in a protracted race to the bottom using the weapons of old, if more often and perhaps with more vigor. Clean promotions data and market basket data both data types that are important to precision marketing have fallen significantly in value since the 2013 report. This will bear watching in the coming year, since a pessimistic reading is that retailers are leaning more towards broad brush promotional campaigns rather than precision ones.

Comparing the value placed on various types of data and the role they actually play in pricing strategies, theres an inconsistency: while demographics and segmentation data have risen in importance, their utilization lags (Figure 19), despite the fact that their role has increased compared to the results of the 2013 study. And while retailers crave more competitor price data, they appear to be getting the value they expect from what theyve got.

Figure 19: Close Al ignment


Does this mean that retailers have abandoned the ideals of precision marketing and price optimization that would presumably enable them to build both top-line revenue and gross margins? The answer appears to be no the results show a more complex story. While clean

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promotions history may have dropped in value, it has risen in its actual role in retailers price strategies. And customer sentiment gathered from social media which retailers are using to glean early indications of the effectiveness of their customer-facing strategies, has risen in both value and actual use.

This all goes back to what we have said several times in this report: what retailers are doing with prices vs. what their pricing objectives are, are in conflict. Companies are fighting against low-price leaders, even while they seem to know that in the long term, just having a low price doesnt win any loyalty. Winners are concerned about their brand image, and they are moving behind the scenes towards a better tomorrow when value is defined as something more complex and interesting than cheap.

Its A Journey Given the promotional fever gripping the US (at least), its a bit surprising that so much attention continues to be put on regular or everyday price management. But retailers do report significant progress in the deployment of technologies to support regular price planning and optimization, promotion planning, competitive price intelligence, and markdown planning (Figure 20). However, markdown and promotion optimization still present a big potential upside for retailers going forward.

Figure 20: St i l l More Upside


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A Challenge And An Opportunity Another way to look at retailers attitudes about technology enablement is ask how many have no plans to roll out certain capabilities. If nothing else, it gives technology advocates a list of terms not to use, and who not to use them with. For example, Price lifecycle management is definitely a turn-off for retail laggards (Figure 21). But aside from playing semantic games, the question is, why are so many technology-driven concepts (such as rules-based engine or optimization when applied to either markdown or promotion) viewed negatively by some retailers?

Figure 21: Natter ing Naysayers Of Negativ ism


While some of the negativity might be explainable in the context of retailer verticals (for example, supermarkets have no interest in markdowns, and high-end fashion has little interest in promotions), the percentages of retailers who have no plans are too big to ignore. This is (obviously) both a challenge and an opportunity for solutions providers.

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The Optimized Advantage We observed earlier in this section of the report that competitive price data has risen in importance (52% of respondents find it valuable and 52% indicate that it currently plays a major role in price setting). The question of course, is how do you get competitive price data? The old, labor-intensive days of the competitive shop have given way to the electronic data feed. In 2014, we see a shift. A narrow majority of retailers now either get a feed from a data aggregator or use a competitive price feed technology vendor to populate their price optimization engines (Figure 22).

Figure 22: Competit ive Data Feeds To Pr ice Optimizat ion


Looking inside the responses, a dramatic difference between Winners and laggards emerges. We see an almost mirrored response from the over and under-performers: 50% of laggards have no competitive price feed vs. 19% of Winners, while 52% of Winners get a competitive price feed vs. 19% of laggards. Clearly for an industry that obsesses about being competitive, Winners are taking better advantage of the resources available to them. We have to ask: why are laggards so laggardly when it comes to getting competitive data? Remember the responses about technology deployment: 61% of Winners use price optimization technology at least for regular prices vs. 36% of laggards, while 29% of laggards have no plans to use price optimization technologies. Under-performers are fighting with one hand tied behind their backs price optimization has become almost baseline capability, especially in a highly commoditized and promotion-driven retail environment.

This inevitably leads to the question of who in the organization needs more education about the possibilities that technology can create? Given that Retail Winners seem to have the edge on leadership, vision, and technology, our expectation was that laggards would most see the need for more education on the value of pricing capabilities and technologies, including both price optimization and competitive intelligence in real- or near-real time. We certainly saw in the Organizational Inhibitors section of this report that more laggards are looking for leadership when it comes to a pricing strategy (Figure 17). But our going-in assumption was wrong: in fact, its Winners who express the greatest need for more education, particularly when it comes to the Merchandising and Marketing staff the very people most likely to have a hand in setting prices (Figure 23).

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How Do You Leverage Competitive Price Data?

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Figure 23: More


The best explanation for Winners emphasis on more education is that they arent content to sit on a lead. This would be consistent with what we know about Winners from other studies they are never satisfied and believe no competitive edge is good enough. Winners want to grow more sophisticated pricing capabilities. Getting optimization in is only the first step for them, and as long as they look for more sophistication, the education need must still be addressed.

Cloudy Prospects There has been a lot of discussion across all industries about the relative TCO (total cost of ownership) of on-premise vs. cloud services. Data publicly available suggest that over a 7 to 10 year period, there is no inherent TCO advantage to either solution model. Cloud solutions real advantage is that they are not capital intensive and are faster to implement. A potential downside is that they are the same for all customers, i.e. they are not customized to fit the peculiar needs of one client. But Price Optimization and Competitive Price Intelligence in particular seem like good candidates to be offered as a service, because a lot of their value comes from data from outside the enterprise. This helps determine the lift and drag factors that affect price. So we wanted to see if retailers are swarming up to the possibilities of pricing solutions offered as services. The answer is, well, maybe (Figure 24).

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Figure 24: Hard Sel l


We can see in the trend over a two-year period that retailers are shifting slowly towards a more favorable view of cloud-based services for pricing. But those solutions providers that offer only cloud-based services still have a long way to go to get past retailers cultural bias towards owning the solution particularly when that solution is deemed as essential to their success.

Technology Wrap-up When it comes to using technology to manage prices more dynamically and (dare we say it?) more scientifically, there is still a lot more that retailers can and should do. While it is clear that technology is used by the majority of retailers to set and maintain regular prices, using price optimization even for everyday prices lags far behind (especially for under-performers). And there is a lot of room for improvement when it comes to using technology to intelligently support promotions and markdowns. Even when it comes to forecasting the effects of proposed strategies or measuring the effects of the strategies executed, more retailers need to do more with the technologies available to them.

Our key concern remains that retailers are not moving fast enough towards the day when pricing strategies are more precise and customer-driven. One technology vendor recently said that, The idea of perfect price within a category one that makes perfect sense on the shelf, no matter which customer is looking at it and where the store may be located, is fading. But while technology firms are talking about customer-centered pricing, retailers are engaged in a messy race to the bottom that is primarily competitor-centric. As we have said throughout this report, this has to change if retailers are to reach their strategic objectives to improve gross margin percentage while still growing the top line and building the Brand image.

The good news is that the technologies available today can really help retailers make the transition.

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How Valuable Are Hosted Or "Cloud" Solutions As A Factor For Improving Your Pricing Capabilities?

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BOOTstrap Recommendations

Its Easy To Go Down Market (But Hard To Get Back Up Again) In the height of the Great Recession, retailers were compelled to discount heavily to get rid of the excess inventory that they had on the books. But its now 2014, and retailers continue discounting and promoting at an increasingly frenzied pace. Consumers have become addicted to the hot deal, and even Retail Winners are having trouble keeping up with competitors pricing even when they have the systems in place to deliver competitive information almost as it happens.

In the final analysis, for all but the most commodity items, price is just one aspect of value the others being quality, the retailers brand reputation, immediacy, service, and, of course, relevance. While its okay to drive traffic toward the retailers brand with exciting deals, defining the brand with the deal is a game that only a very few can win. Everybody else loses, and even Winners only win by being hyper-efficient on the buy-side of their business and ruthless in maintaining a low SG&A. Back in the 1980s when a company found itself competing with Walmart, the smart CEO dictated what the strategy should be: Watch what they do very carefully, and then do something else. A quarter century later, this remains true.

Our April 2013 benchmark on Pricing made a BOOTStrap recommendation and we stand by it:

Resisting Discounting's Siren Call Pricing is both one of the most strategic and also tactical retail demand levers. ...We're never going to persuade retailers to abandon the siren call of cutting prices to stimulate sales - we're not even going to try. What we hope retailers will consider, instead, are some key ways they can turn pricing into a strategic advantage, whether a luxury retailer or a deep discounter, whether caught in the throes of showrooming or safe and sound in a brand that just can't be copied.

It doesnt appear that this advice is being heeded, but it needs to be, one step at a time. There can only be one low price leader in any one vertical and market, and all the rest that follow down-market will either languish or face the hard task of trying to climb back up-market with a value message that is not primarily price based. If your company is NOT the low price leader, start the process of redefining value, and begin weaning your customers away from cheap.

Forecast And Measure There is simply no excuse for failing to forecast the impact of potential price changes on demand, sales, and profitability, and yet we saw that almost 40% of laggards and even a quarter of Retail Winners are challenged to do that. And its even worse when it comes to measuring the impact of strategies that have already been executed: 44% of laggards and 26% of Winners are challenged to accomplish that. Once again, not much has changed since the 2013 benchmark report:

Measure the Impact of Price Changes Yes, this requires data - clean data - and it requires discipline The virtuous pricing cycle of plan execute measure falls apart if you ignore any point in the circle. And retailers have been ignoring Measure. If you can't measure, how can you correct for the last cycle's mistakes? How do you know if you executed the way you needed? Measurement should be a priority, even if it isn't clean or easy - sometimes the journey is just as valuable as the destination.

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Use Optimization Science To Achieve Your Goals RSR doesnt promote specific technologies its our charter to focus on the business challenges and opportunities that technologies can address, rather than on the technologies themselves. But failing to use the proven science behind Price Optimization technologies has become a true inhibitor for retailers. The science isnt new in fact, its been available (encoded in Price Optimization technologies) since the 1990s.

In those days, we initially used a Price Optimization service to determine which items needed to drive traffic and which could be used to drive margin for our fastest turning sub-categories. Even with the dirtiest data imaginable, we were able to take advantage of the law of large numbers (the more times something is measured, the more that random variations tend to lose meaning on the overall result). What we didnt have, but the service could provide, was external data about the market, consumers, and competitors.

Both the science and the solutions have advanced by leaps and bounds since then, and they can be used for something besides setting base prices promotion and markdown planning also can benefit.

Leadership - And A Strategy We saw in this study that over twice as many laggards as Winners are looking for strong Line of Business leadership to drive change in pricing processes. Thats great leadership IS needed. But developing a step-wise approach towards more sophisticated capabilities is important in order to get to good. As already stated, the business process should be a virtuous cycle of plan execute measure.

Don't Ignore The Lifecycle Products and their value have a lifecycle, from introduction to the market, to maturity, through end-of-cycle and ultimate elimination from the assortment. A shocking 56% of retail laggards and even 28% of Winners have no plans to address end-to-end price lifecycle management. For those retailers, others who do subscribe to the lifecycle theory will define the rules in the marketplace. Why be a follower when you dont have to?

Move Towards Precision Marketing & Pricing Although it's hard to see a different reality for all the item-and-price promos cluttering our vision, a different model is emerging nonetheless, one that embraces a customer-centric value offering based on personal relevancy to the consumer. As one retail executive recently said, Consumers have become promiscuous. So how does a retailer move them to being truly loyal?

The answer: by being relevant to them and that can only be accomplished if the retailer uses the new data available to them to determine what is in fact relevant. It is a dynamic, not static, model. Pricing will be affected by this too imagine a world where different customers pay different prices for the same solution, based on our understanding of their need multiplied their loyalty factor. Its not that far away.

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Appendix A: RSRs BOOT MethodologySM The BOOT MethodologySM is designed to reveal and prioritize the following:

Business Challenges Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise.

Opportunities Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and also-rans. Within the BOOT, we can also identify opportunities missed and describe leading edge models we believe drive success.

Organizational Inhibitors Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning Retailers understand their organizational inhibitors and find creative, effective ways to overcome them.

Technology Enablers If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers.

A graphical depiction of the BOOT MethodologySM follows:

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Appendix B: About Our Sponsors

360pi helps top retailers compete and win in an increasingly price transparent environment. 360pi actively monitors millions of products from hundreds of retailer websites and delivers price intelligence for exact and similar matched products with unprecedented accuracy. 360pi's customer base of "brick & mortar", e-commerce, and multichannel retailers accounts for over $US100 billion in annual retail sales and includes Ace Hardware, Best Buy Canada, and Overstock. 360pi clients gain real-time visibility into the market and full awareness of the competitive pricing landscape to "right price" to consumers. Ultimately, 360pi's customers make smarter pricing decisions that drive increased conversions, revenues, margins and customer loyalty.. For more information, please visit: www.360pi.com

Revionics End-to-End Merchandise Optimization enables retailers to execute omnichannel merchandising strategies utilizing a comprehensive set of shopper demand signals to meet financial objectives and drive loyalty. These solutions leverage advanced predictive analytics and demand-based science to ensure retailers have the right product, price, promotion, placement and space allocation across all touch points online, in-store, social and mobile. Offered on a highly scalable SaaS platform, these solutions help retailers future-proof from Big Data/Fast Data challenges while providing speed-to-ROI. Over 37,000 retail locations across grocery, drug, building materials, convenience, general merchandise, discount, sporting goods stores and eCommerce sites optimize with Revionics. (www.revionics.com).

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Appendix C: About RSR Research

Retail Systems Research (RSR) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by:

Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses;

Identifying industry issues that solutions providers must address to be relevant in the extended retail industry;

Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry.

Copyright 2014 by Retail Systems Research LLC All rights reserved.

No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact [email protected] for more information.

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