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?
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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)
Amit KapoorMarch 2012
Challenges – Typical pricing capability gaps
7
• Policy and Level
• Insight
• Tool Box
• Process and Governance
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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)
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
POS driven Analytics – Tesco / Dunnhumby
15
• Segmented customer base + Loyalty tiers
• 7 million coupon price promotion; 10x effectiveness
• Linking to POS analytics to availability
Amit KapoorMarch 2012
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!
Amit KapoorMarch 2012
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)
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
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
Amit KapoorMarch 2012
You can access this file online at goo.gl/dPNph
If you have any questions, please contact me at [email protected]