Advanced Pricing Implementation Success:
$8 Million Margin on Eight Items in Eight Weeks
In this post, we take a deep dive into the astounding success of a Parker Avery client’s advanced pricing implementation.
Parker Avery’s case study for this advanced pricing implementation was published shortly after the project was completed, but the “eye-popping” results came just weeks later, with the client realizing $8 million in margin impact on just eight items in eight weeks. With the solution’s five-year licensing fees totaling $7 million, this outcome represents an incredible ROI for just the pilot.
About Advanced Pricing Systems
Advanced pricing systems include regular price optimization and markdown optimization, which consider a retailer’s inventory position in different locations within the supply chain. The greatest imbalances between supply and demand happen at the individual store, and if a retailer can address inventory underages and overages differently by store through better pricing decisions, then aged inventory is decreased much quicker and more margin is retained during the clearance process.
Advanced pricing systems also include promotions optimization, which is a newer, still developing offering that combines elements of promotions management, planning, and analysis with an optimization capability.
Further, there is the concept of dynamic pricing, where prices are changed throughout the day in response to any number of variables such as customer traffic, weather, supply levels, etc. The most obvious use case is airline ticket pricing, but in retail, dynamic pricing is used by some digital-only retailers, as well as gas stations, due to the highly fluctuating nature of oil. Some retailers have explored this capability to move inventory quicker or encourage customer traffic during slow periods.
With these tools, every cent changed on a price directly impacts the retailer’s bottom line. Coupled with the margin impact, the ability to accurately predict outcomes of specific pricing decisions (up or down) can drive superior returns on investment (ROI).
The Client’s Challenge
This client is a discount grocer and therefore follows a low-price leadership strategy. In this type of pricing strategy, a technique called zone pricing is sometimes utilized by establishing varying types of pricing characteristics for different customers and then altering pricing slightly within those groups to capture differences in propensities. Taking into consideration the multitude of grocery competitors in the U.S., this client had previously piloted zone pricing. However, because their zone pricing pilot was managed in spreadsheets and manually keyed into host systems, their result was rudimentary. The process was too time-consuming yet demanded more sophistication to stay ahead of the competition.
The grocer followed a rules-based pricing approach, meaning they would take competitive prices into consideration. They were keen on making sure their prices were at a discount compared to comparable items sold by competitors. This grocer was primarily gathering data from third-party in-store audits, driven by the client’s merchandising organization. This process was fraught with data accuracy issues due to human error, as well as a lack of familiarity with items and competitor assortments. Since the client was highly dependent on competitive pricing information, their rudimentary methods of gathering competitor data led to questionable results. (Note: Competitor price intelligence is an emergent area. The technology has existed for several years, particularly in e-commerce, but it does not necessarily lend itself well to certain categories like grocery.)
These techniques made up the core of the client’s pricing strategy.
What is zone pricing?
Zone pricing entails establishing varying types of pricing characteristics for different customers and then altering pricing slightly within those groups to capture differences in propensities.
Further, the company was transitioning from a regionally-managed business model to a centralized one. Their store operations divisions still had some control over pricing for the most impactful items in their assortment. As a result, the company had little control over the price strategy and the margin of those items because each region was using them to maintain profit and loss statements while trying to respond to perceived competitive threats.
Like all retailers, the client faces increased competition: Amazon and large chains like Walmart and Target are deepening their penetration in grocery and investing in technology, and new entrants continue to expand on the low end of the market. The client faced these competitive pressures while experiencing profit swings because of the decentralized control of pricing and margins. Leadership’s ability to course correct was hampered by the lack of a sophisticated pricing system that would allow them to understand the appropriate competitive responses to various price changes.
Parker Avery’s Role
During client projects, our team spends time upfront in a discovery phase, deeply understanding the company’s business model, how they compete, how they drive value, their culture, and their customer base. With this intimate knowledge, we can behave as part of the client’s team. This project was no exception, and, equipped with deep advanced pricing expertise and experience, we were perceived as an extension of the internal team throughout multiple phases of the client’s advanced pricing initiative.
System Selection and Implementation
In this capacity, we supported the client through the selection of advanced pricing software and the eventual solution implementation. Specifically, we brought industry-leading business process design, implementation, and retail change management expertise, as well as knowledge of challenges and pitfalls from working with system providers in the advanced pricing space. The Parker Avery team structured the activities, provided project oversight throughout the selection and implementation, and advised the client on specific opportunities to improve their pricing strategy.
Business Liason
During system implementations, Parker Avery typically acts as the liaison on behalf of the client. As such, we also supported the client and implementation team through technical design and development. While we are not system configuration experts or integrators, because of our client and functional area knowledge (in this case, advanced pricing), our team can translate what the business users, software team, and other technical roles each need to know to complete their individual tasks. The business liaison role that Parker Avery plays on projects and the communication with the business is key to optimal business user adoption and implementation success.
Data Preparation
Additionally, we helped with data preparation, a critical task for success in any system implementation. Because most advanced pricing systems are software-as-a-service (SaaS), based on a common code, and therefore are rarely configured or customized, the biggest challenges in advanced pricing implementation projects center around obtaining the proper data, conditioning the data, and ensuring it is communicated to the pricing application in the required format. Data cleanliness and governance are so often talked about and yet these efforts are also often underestimated—especially with respect to pricing data. Parker Avery’s team guided the implementation team through this arduous but key task.
Business Process and Organizational Design
During this advanced pricing system implementation, Parker Avery also led business process design to integrate the advanced pricing solution with the client’s pricing process. Our team also defined new roles and responsibilities. As a result, some merchandising roles formerly responsible for pricing (on the buying team), were switched into a dedicated pricing team. While technically still in merchandising, some reporting structures changed as well as some responsibilities. Using proven business transformation methodologies and incorporating industry leading practices, Parker Avery guided the transition between former and new business processes, roles, and responsibilities for this critical portion of the project.
User Adoption
Many times when we approach new system implementations, there are tenured client resources who are accustomed to operating with their existing legacy tools and spreadsheets. While these individuals are highly knowledgeable in their areas, the sheer amount of information an end-user pricing specialist must manage becomes overwhelming. Coupled with hesitancy in trusting new tools, particularly those driven by advanced algorithms and artificial intelligence, user adoption is critical. The only way to achieve success with an advanced pricing system implementation is to encourage impacted roles to be instrumental in the change, provide coaching for them to adopt, and ensure proper sustainment tools and strategies are in place. Employing our tailored approach to change management, Parker Avery led client resources through adoption of the new system, including educating tenured roles to understand and trust the math, and more importantly the pricing recommendations.
Hands-On Learning
Parker Avery’s team also supported the client through the pilot and multiple layers of the rollout, taking a highly methodical approach. Specifically, our team would perform one pricing task while the client team would observe. Subsequently, the roles were reversed until the client team was comfortable proceeding on their own. Following this process, the client was eventually so proficient with their role and discourse, Parker Avery’s team only needed to answer direct, occasional, individual questions.
Value Measurement
To assess the value delivered by the advanced pricing solution, it was also important to select the most accurate and unbiased approach to measure the impact of recommended price changes on the client’s revenue and margin. In addition to the solution’s embedded value measurement capabilities, Parker Avery’s team assessed several other alternatives: pre/post analysis, test/control store comparison, and comparable item analysis. After considering factors related to time and resources required to develop the capability, ease of execution, and expected accuracy for each method, we identified the optimal approach for the client. The approach became an integral part of the client’s pricing process, driving assessment of the effectiveness of every recommended price change and the overall pricing strategy.
Implementation Success Factors
Change Readiness and Leadership Credibility
One of the main factors in the success of the advanced pricing system implementation was change readiness. Much of this is due to the client project team, who were quick on the uptake, great communicators, and very well respected within the company. When starting any new capability, it is imperative that the initiative’s leaders have innate credibility. Without credibility, there will be a greater hurdle in terms of acceptance. This client, fortunately, did not have this challenge.
Quality Competitor Data
Prior to the implementation, the client was using semi-accurate data collected periodically. Part of the advanced pricing system implementation included upgrading the client’s competitive data capability. Enhancements included web scraping and changing the nature and frequency of their in-store price gathering. As a result, both the data quality and the insights the merchants produced improved.
Leveraging Zone Pricing Capabilities
Advanced pricing solutions are designed to manage zone pricing capabilities, which is a major driver of increased margin. The client was able to expand their zone pricing and target prices within those zones to specific regional competitors or regional characteristics to the price sensitivity of products.
At the same time, the company maintained or improved its competitive pricing indexing. By ensuring they were hyper-competitive on price-sensitive items, the client was able to raise prices slightly on less competitive products, based on zone-specific customer behaviors and competitor pricing—positively impacting margin.
Understanding the Science
As a grocery discounter, the client was traditionally hesitant to raise prices. Prior to the new advanced pricing system, their philosophy was to price below competitors for fear of losing customer trust and loyalty. However, understanding the science underlying advanced pricing, coupled with the pilot results provided the confidence that they could raise certain prices with no negative customer impact. These marginal price increases are instrumental in delivering extraordinary returns on advanced pricing systems.
Dedicated Thought Partner
The Parker Avery team assigned a thought partner in the client’s pricing organization to advise on critical business decisions and free up the merchant team so they could focus on non-pricing decisions, such as planning and assortment.
The COVID Impact
This client project was completed pre-COVID, but the pandemic had a big impact on their business in a more strategic way. Because they are on the discount side of the grocery sector and were deemed “essential,” demand increased during the pandemic. Excess demand for products in a typical grocery assortment during COVID presented the opportunity to capture extra margin by raising some product prices.
On the flip side, it is bad form to profiteer from an international crisis and to be perceived as price gouging. In the early days of the pandemic (spring 2020), the client put a moratorium on profit-based price changes. This enabled the company to focus on addressing highly price-competitive products and categories.
The company used the pandemic as an opportunity to take a hiatus in rolling out pricing system functionality to additional categories and enabled it to work on solving data complexities in order to bring critical but more complex categories online with the advanced pricing strategy.
How to Begin with Advanced Pricing
There are different levels of approaching advanced pricing systems, depending on the nature of the business and the scale or sophistication of existing systems.
1 | Assess Price Elasticity
For companies who may not feel they are ready for a full system due to their technology or data infrastructure, Parker Avery’s analytics team can do an elasticity study in tandem with the business. This study gives the retailer insights into the shopper sensitivity to price changes for individual items within their assortment. Using these results, we build a process and toolset that allows customers to make more informed pricing decisions.
2 | Perform Price and Markdown Optimization
In the middle of the spectrum, Parker Avery can provide an analytics engine for regular and markdown price optimization. The optimization output can be accessed through Excel and is another step of sophistication without the overhead of a full-blown advanced pricing system.
3 | Evaluate Advanced Pricing Systems
For larger retailers with more mature technology environments, we advise thoroughly assessing some of the commercially available advanced pricing systems. There are systems with different ranges of scale and capabilities that are appropriate for varying retail segments. Additionally, not all retailers require the full suite of advanced pricing. As an example, for a vertical fashion brand with no direct competitor, regular price optimization may not be appropriate because there are no carry-over products. In this case, the focus may be more on promotions or markdown optimization based on inventory levels to manage the end-of-life cycle. Parker Avery can help guide clients through the entire system selection process, ensuring the technology selected will best suit the company’s unique business requirements.
The Parker Avery Group can advise retailers on which one of those paths makes the most sense, given their needs and current level of sophistication. If you have any questions about your own pricing strategy or existing tools, we would love to have a conversation about how The Parker Avery Group can help.
Contributor
The Parker Avery Group is a leading retail and consumer goods consulting firm that transforms organizations and optimizes operational execution through development of competitive strategies, business process design, deep analytics expertise, change management leadership, and implementation of solutions that enable key capabilities.
