Four Keys To Effective Price Optimization

By Brian Elliott,

It’s no secret that retailers are under immense pressure to improve profitability and gain a greater percentage of customer spend. So it’s not surprising that more merchants are realizing the value of price optimization as a key contributor to same-store sales increases, an improved competitive position and better customer loyalty. To be effective with price optimization, though, companies need to take into account some important considerations.  

There are four key factors to making price optimization as impactful as it can be:

1. Take a holistic view: Many retailers don’t always take a complete view when it comes to pricing.  They may understand price elasticity, but not understand where that demand goes or where it is coming from.  It’s not just short-term consumer response — retailers need to understand the long-term consumer response, how to optimize their margin, traffic, basket and supply constraints/inventory clearance. Pricing impacts all.
2. At the same time, be granular: It may sound contradictory to the holistic point above, but retailers need to be granular in their price optimization strategy. They need to not only segment and understand KVI’s (Key Value Items) that drive price perception, and anti-KVI’s that can be mined for profit, but also segment in many other ways — by category, price zone, format — and price accordingly. It’s important to be able to manage strategies across these overlapping segments in the way humans think, and not the way computers think, to escape the nightmare of managing rules hierarchies. Done the right way, granular can still be simple to manage.
3. Ensure that you have access to robust online competitive intelligence: Pricing is getting more dynamic and transparent, and consumers are able to check competitors’ pricing, impacting their decisions and how they may feel about a retailer. This makes gaining online competitive intelligence more important than ever — on both identical and similar items, the same way shoppers compare. Even if you are not reacting at the store level, retailers can still more dynamically price online depending upon competitors’ actions.  
4. Integrate pricing and promotion strategies: With better insights, retailers can determine the best events to run and enhance productivity in their planning. They can quickly micro test using digital environments to develop wholly new events, and measure performance before rolling them out in mass promotions. Once they know which events help deliver on which objectives — profit, share, traffic or loyalty — they can use promotions to generate excitement, positively impact the price perception of the total basket and cost-effectively compete for the loyal trip.

Pricing is rapidly evolving into a critical competitive advantage — or disadvantage if not done properly. With both a holistic and granular view, access to competitors’ pricing and a cohesive pricing and promotional effort, retailers can move away from “gut feel” to a data-driven pricing strategy — the right offer, the right location, at the right price with the right range of products, in order to win customer loyalty and greater share of shoppers’ wallets.

Brian Elliott is the CEO of Periscope™, a McKinsey Solution. As an entrepreneur and inventor, Elliott helped create many of the practical frameworks that established McKinsey as the leading Consumer Pricing and Revenue management consultancy globally. As a founding Board Member and then CEO of Periscope™, he led the conversion of that experience into a suite of commercial performance solutions that leverage big data and advanced analytic insights as the foundation to optimize pricing, promotions, assortment and overall performance management across Retail, Consumer, B2B, Banking and Travel industries on six continents.