Solving the pricing puzzle

Price optimization software, electronic shelf labels and cloud computing are helping grocers manage increasingly complex pricing strategies.

Weekly specials and frequent shopper programs that offer mass discounts are no longer enough to lure—or retain—shoppers. As supermarket executives explore new pricing paradigms they are relying on analytics, price optimization software and electronic shelf labels (ESLs) as their weapons of choice.

“Historically, grocers combined motivational sales with ‘everyday low price’ propositions to remind shoppers that their brand stood for low prices,” says Marc Dietz, vice president of marketing for DemandTec, a business analytics technology provider based San Mateo, Calif. “They are learning that this strategy doesn’t hold water in the current economy. In hopes of growing margins, retailers are evaluating a more complex set of options when making pricing decisions.”

One piece of this new pricing strategy is the industry’s evolving promotional culture. The days of weekly campaigns are transitioning to short-term, pop-up promotions.

“Grocers are breaking away from the weekend flier,” says Sunit Saxena, founder and CEO of Altierre Corp., a San Jose, Calif.-based provider of ESLs and other wireless technologies. “If promotions are stale, they are not bringing in traffic anymore,” “By eliminating 10,000 weekly sale items and instead promoting 3,000 on Monday, another 3,000 on Tuesday, and so on, retailers will create more excitement and be a differentiator in the marketplace. It’s about creating excitement.”

Mobile devices are also changing the pricing game as consumers can compare prices as they stand at the shelves, say industry observers.

Crunching the numbers

Increased competition and price-sensitive consumers are forcing supermarket executives to go beyond gut instinct and spreadsheets when making pricing decisions. Observers say they are moving toward analytical tools that evaluate promotional planning, price and advertising execution based on local consumer preferences, demand, and competitive activity.

Price optimization has been gaining traction since its initial debut in the early 2000s, and demand continues to grow. “Price optimization applications focus on elasticity and suggest prices based on overall category plans,” says Tony Pusateri, vice president of business development for ZBD Displays, a Skokie, Ill.-based ESL provider. “They optimize pricing, while maintaining margin contribution, through a blend of promotions, higher margin, less sensitive items, loss leaders, and other considerations. The result is an overall pricing strategy that is expected to contribute to sustained profitability.

Abingdon, Va.-based K-VA-T Food Stores operates 104 stores under two banners, but officials rely on localized pricing and promotion strategies to drive traffic. K-VA-T uses a price and promotion optimization tool from Revionics, a Roseville, Calif.-based software provider, to help manage category planning, weekly price maintenance and price optimization for localized pricing zones on a weekly basis. In addition to insight into market patterns and consumer preferences, K-VA-T uses the solution to manage rules-based pricing, and conduct consumer demand modeling to optimize base prices and deliver more value to shoppers.

“Our primary pricing goal is to offer our customers the most value for their grocery dollar. The solution delivers superior predictive analytical and optimization tools we need to achieve this goal,” says Richard Gunn, K-VA-T’s executive vice president of merchandising and marketing.

Rouses, a 37-store chain based in Thibodaux, La., also uses Revionics’ price optimization software. Based on successes over the past 24 months, the chain continued to apply the solution at all new stores it opened in 2011. “The speed, transparency, flexibility and ease of use of the solution allows us to quickly adapt to our customers’ shopping needs, wants and patterns in a confident, strategic way,” says Malcom Landry, director of administration for Rouses Enterprises.

Not all retailers find it easy to make this transition, say observers. Due to new retailing concepts, emerging channels and more customer touchpoints than ever before, retailers are hard-pressed to gain insight into consumer shopping patterns.

Something for everyone

“All retailers, whether they are promotional or feature everyday low prices, require effective price and promotion solutions,” explains Shah Karim, CEO of Saferock Retail, a Dumont, N.J.-based provider of digital content.

Saferock’s Netvantage is an advanced analytical tool that uses statistical and mathematical techniques designed to improve retail profits by optimizing pricing and promotions, and details all efforts at the planning and execution stages, say company officials. Data helps retailers understand and manage promotion effectiveness, and as a result, drive foot traffic and transactions that are in sync with product and price strategies.

The next phase of analytics is integrating pricing and inventory data to reduce out-of-stock situations. “We are starting to see more interplay between the components of automated ordering, price and promotion optimization,” says Bob Smith, product manager, customer marketing for Retalix, a Plano, Texas-based software provider. “Forecasts, inventory control and optimization are all playing into each other and it is helping some retail companies become more leading edge in their buying decisions and pricing strategies.”

Far from a new concept, electronic shelf tags date back to 1984, when a prototype ESL system debuted in a Dallas supermarket as a replacement for paper shelf price tags, according to officials at the Washington-based Food Marketing Institute. However, they have come a long way from plastic static electronic labels that featured a simple product picture and price.

Current concepts are user-friendly, fully graphic and much more cost-efficient than their bulkier predecessors, observers say.

“As decision-support systems around retail price execution have become very advanced, too many companies still rely on traditional, costly printing of paper labels for shelf-edge pricing execution,” says ZBD’s Pusateri. “While early versions of ESLs were constrained by the number of price changes done at store level, the technology has advanced. As grocers take advantage of price optimization systems that help them react quickly to competitive threats and ensure cost changes are re-priced as they occur, ESLs support grocers evolving go-to-market [pricing] strategy.”

In addition to their ability to ensure pricing accuracy and enable quick price adjustments, observers note that ESLs can aid in planogram compliance and promotional planning. This allows grocers to create targeted pricing for specific items—and shoppers—on the fly, based on store-level shopping patterns.

“Our solutions also unchain the retailer from manual price execution methods and open up the potential of decision-making support systems,” Pusateri explains.

Rather than rely exclusively on expensive software and computing platforms, more companies are relying on Internet-based cloud technology that enables them to tap into computing resources as needed.

“By bringing pricing solutions, especially optimization tools, to the cloud, the technology is becoming even more accessible to retailers and more are able to take advantage of their benefits,” says Retalix’s Smith. “Cloud applications are a quicker easier and more cost-effective option for retailers.”

Revionics’ software-as-a-service platform is grabbing retailer attention as it accelerates installation time, and increases companies’ rapid ROIs. Similarly, Saferock’s Netvantage is a software-as-a-service model, “so no equipment needs to be installed in-house; we manage of all the servers at our location,” say Karim. “We tie in to [the retailer’s] data warehouse in a secure way, then evaluate the retailer’s data using proprietary models and algorithms. Promotion ROI is measured every day and reported by category, department and buyer.”

As CIOs examine how and where cloud computing can fit into their enterprises, observers say pricing can be a lower-risk area to explore, observers say.

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