retail pricing perspective

Perspective on Retail Pricing IIMB Discussion Session

March 2012 Bangalore, India

Amit Kapoor

Context

2

• Retail is Personal – “First Moment of Truth” happens on the middle shelf on aisle 5!

• Retail is Local – Store formats located within walking / driving radius are the ones that count (or the ones that delivers!)

• Retail is Evolving – At least organized multi-brand retailing (FMCG / Grocery / Apparel / Electrical etc.) in India and abroad

Amit KapoorMarch 2012

Retail Pricing Perspective

3

• Why is it Important?

• What are the Challenges?

• What are the Approaches?


Importance – Capabilities Lens

Customer Service

Operations

& In-store Execution

Demand

Planning & Inventory Mgmt.

Category Management (Assortment / Range, Price,

Promotion, Merchandising, Supplier, Private Label)

Consumer Insight &

Format Strategy

Planning, Space

& Marketing Strategy

Strategic

Executional

CommercialPricing Structure, Price Level, Price Communication

Value Creation / Pricing Policy

Pricing Execution, Price Metrics

4Amit KapoorMarch 2012

Importance – Profitability Lens


5

Retail Margin

• Assortment• Price/promotions• Merchandise / Layout• Service/Loyalty

Sales

Customers

BasketValue

# of visitorsfootfall

% buyersconversion rate

No items

Average item price

• Location• Format / Concept• Advertising / Offering

• Assortment• Price / Promotion / Loyalty• Merchandise / Layout

• Format / Concept• Price / Promotion

Merchandise

Costs Point of Sale (POS)

Employees

Space

OtherCentral

• Assortment/PL• Suppliers• Supply Chain

• Service level, unit cost, productivity

• Location, use, turnover

• Maintenance, cleaning, utilities,…

Importance – Impact Lens

6

Variable Cost

Fixed Cost

Net Margin

72.6%

24.7%

2.7%

Retailer Cost Breakup Key Retail Profitability levers

Addressed through cost efficiency initiatives

Net

Mar

gin

Incr

ease

Elasticity

=-0.25

Elasticity = -1

(Revenue Neutral)


Challenges – Typical pricing capability gaps

7

• Policy and Level

• Insight

• Tool Box

• Process and Governance


Policy Challenges

8

• Rule based

− Based on cost plus margin; driven by supplier pricing

− Based on rigid guidelines – strict Hi-Lo

• Competition based - Matching / follower strategies

• Customer based – Targeting the average customer


Policy Challenges – Setting the Right Price

9

Cost-to-serve

Willingness-to-pay

(Value pricing)

Retail

Price

Level

Desired customer behaviours

How much value to share with the customer?

Upper Bound

Lower Bound

Customer price sensitivity Non-product offering (e.g. service,

convenience) Relationship with customer Meet competitive threats

Actual cost-to-serve by customer segment (DPP)

Customer buying behaviour Channel / customer service costs

Drive foot fall Increase penetration or market

share Encourage switching


Insight Challenges – Understanding Elasticity

10

Category: Chest Freezer

Average Selling Price (£/unit) Average Selling Price (£/unit)

Category: DVD Camcorders

Elasticity = -0.12 In-elastic category 1% change in Price will result in

0.12% change in Sales Quantity

Elasticity = -4.68 Highly elastic 1% change in Price will

result in 4.7% change in Sales Quantity

Log (SQ) = 17.3 - 4.68 * Log (ASP) + 0.64 * Log (Seasonality)S

ale

s V

olum

e (‘0

00s

units

)

Sal

es

Vol

ume

(‘000

s un

its)

Log (SQ) = 5.7 - 0.12 * Log (ASP) + 0.97 * Log (Seasonality)


Insight Challenges – Not that easy!

11

• Elasticity

• Demand Model

• Probing or Trials

• Pooling with and without cross-elasticity

• Lifecycle Price Decay Curves

• Cannibalization Factors

• Conjoint Analysis


Tools Challenges

12

Demand Based Management (DBM)Price, Promotion, Range, and

Merchandising

DemendTec, SAP Khimetric, SAS,JDA, KSS Retail, Oracle Profitlogic

Enterprise Relationship Management (ERP)

Finance, HR, IT, and Manufacturing

SAP, Oracle, Peoplesoft

Supply ChainManagement (SCM)

Purchasing, Logistics, Inventory and Distribution

JDA/i2/Manugistics, SAP

Customer Relationship Management (CRM)

Sales, Marketing, and Service

Siebel, Oracle, Salesforce.com

Efficiency

Cost

Revenue

Optimization

POS EnabledDDSN


Process and Governance Challenges

13

Process•Trader mentality – limited structure and guidelines•X-functional engagement (Marketing, planning, channels)•Lack of alignment to category / brand strategy

Governance •Limited governance on pricing management / leakage•Driven through overall margin KPIs –reward and incentives

aligned to them


Approaches that work

14

• Using POS driven analytics: Tesco

• Developing a consumer-centric / geographic model: Best Buy

• Managing price expectation: Trolley Pricing, John Lewis

• Enforcing competitive / EDLP pricing with discount model: Aldi

• Shaping demand with coherent capabilities: Zara


POS driven Analytics – Tesco / Dunnhumby

15

• Segmented customer base + Loyalty tiers

• 7 million coupon price promotion; 10x effectiveness

• Linking to POS analytics to availability


Consumer Centric / Geographic– Best Buy

16

CDs, DVDs

Departments

Low High

Jill (Suburban Mom)

BBFB

Barry (Affluent Customer)

Buzz (Early Adopter)

Ray (Family Man)

Other Targets

All other

“Bought” “Sold”

Jill: More service throughout the store

Barry: Self sufficient in many, very focused on home theater

Ray: Show me the latest entertainment device

BBFB: Product/solution specific

Home

Theater

Buzz: Don’t bother me, I’m almost through level 12!


Managing Price Expectation - Trolley Pricing

17

Price Match / Lower

Competitive Pricing

Margin plus Pricing

Destination e.g. Milk

Convenience e.g. Confectionary

Routine e.g. Cereals

Occasional e.g. Flower

Background Key Value Lines

Core

Product Importance(role, comparability)

Geographic Importance (competition intensity)

Category Importance(frequency, type, role)


Managing Price Perception – John Lewis

18

• Price Protection and Guarantee – “Never Knowingly Undersold”

− Will match any advertised pricing for a similar in–stock product by a “conventional shop”

− Will refund the price difference up to 28 days from the date of purchase

• Does not apply to online and catalogue prices


EDLP Model – Aldi Discounter

19

Drive Volume Share

Invest inPrice

Maintain Net

Margin

Drive Efficiency

Buy for Less

800 -1000 SKUs with 15x volume

Increased returns to Shareholder

Provide EDLP prices to consumers

EDLC operation with 5 -8% cost

Extend competitive threat


Shaping Demand – Zara

20

Specialty Retailer

COGS Margin

20

0

100

500300 400 700200

120

0 800100 600

80

60

40$ (I

nd

exed

)

Sales / Sq Foot

Regular Price

Mark down

700300100

20

80

100

120

60

800

40

600200 4000

0 500

$ (I

nd

exed

)

Sales / Sq Foot

~15% Price advantage

20% cost disadvantage

55% Greater Margin


Final Thoughts

21

• Develop consumer-back strategy – understand the buying process and consumer segments

• Invest in analytics – predict, forecast and also shape demand

• Align with business model – integrate capabilities and execution


You can access this file online at goo.gl/dPNph

If you have any questions, please contact me at [email protected]

retail pricing perspective

Business

private label

amit kapoormarch

average customer

supply chain

paint brush

pos analytics

000s units

dvd camcorder