Price/Revenue Optimization

Determining the best product price without missing a profit event is a science-based, algorithmic experience - not a hit or miss adjustment or a cost-plus exercise. By using price optimization software, retailers can consider multiple variables to identify the smartest price points. No longer a "nice to have" resource, price optimization technology is an IT necessity for large, small, independent, every-day-low-price and high-low retailers seeking to maximize revenue and meet their financial objectives.

What it Means
Price optimization software has recently emerged as one of the hottest IT investment areas in retailing. Sophisticated price optimization engines integrate a number of variables: historical price variations; cost and competitive data purchase behavior; multiple pricing and demographic market zones; and other key factors.

Application packages from vendors, like Revionics, KSS Retail, DemandTec, SAP and Oracle, let merchants, category management teams and pricing analysts make timely pricing decisions that take into account key operational constraints. Tools apply mathematical, economical and statistical algorithms to discern pricing, manage ongoing pricing rules and control interactions with price hosting, replenishment and other downstream systems. They predict the impact of proposed price changes on revenue, unit volume and profitability. Customized reports show, among other intelligence, pricing information by product or location hierarchy with various performance metrics, including sales, revenue, margin and price changes per market. Real-time "what if" scenarios are modeled. This allows immediate changes to be made to leverage current conditions and opportunities.

What's at Stake
Many retailers utilize this technology. But supermarkets have a special incentive. Their margins are razor thin and promotional activity is common on food and non-food items. Nationally branded consumer packaged goods suppliers often participate in promotions.

"In the supermarket trade class, earnings before interest and taxes are roughly 4 percent," says Pat Walsh, vice president of industry and trade development for the Food Marketing Institute (FMI). "Unlike in the apparel segment, where more profit is built into products, grocery items that typically generate just four cents on the dollar bring pricing thresholds directly into play. If I take the price too high or too low, what have I lost? There's a small window where supermarkets can find pricing comfort while maintaining their marketing strategies and pricing image in terms of acquiring and retaining customers."

Pricing optimization has moved from mere opportunity to strategic requirement. It can have a major impact on a company's financial picture and stock valuation. "Price optimization is the only software mentioned by stock analysts that has a direct correlation to their stock ratings," says Greg Buzek, president, IHL Group, a firm specializing in retail technology deployment.

"Retailers installing this software historically have seen significant financial improvements, as it produces almost immediate effects on the bottom line."

How to Succeed
Hollister Supermarkets is an independent supermarket chain in California's competitive Central Valley. Chang So, Hollister's general manager, says Hollister implemented Revionics' pricing system last year. The system taps into competitive pricing, price changes from vendors and item movement. The latter, says So, is "the most important part of the equation." It also outputs suggested promotions and integrates special pricing for categories that are highly price sensitive.

"We can now charge more for certain items while maintaining velocity," says So. "We can reduce pricing on others while increasing velocity by 50 percent or more. We're experiencing higher margins throughout our stores and increased sales, due in large part to this system. Pricing optimization technology helps when competing with large grocery chains as well as mom and pops."

Hollister also is using the Revionics tool for its trade promotion program. This allows the retailer to use all vendor promotions without store personnel having to "spend hours" sorting through hordes of information.

In 2007, Food Lion implemented a price optimization solution from DemandTec to about 20 percent of its 1,300 stores' major categories. The application (along with the upcoming new pricing system) will allow category teams to become more efficient in segmentation work, says Food Lion spokesperson Kimberly Blackburn.

C&K Markets, the largest privately-held retail grocery chain in Oregon, also uses Revionics technology to optimize pricing, as does Supervalu, C&S Grocers' regional chain Grand Union Family Markets, Scolari's, Fresh Encounter and Boyer's Food Markets. Revionics is also active with retailers in adjacent verticals, such as general merchandise and hardware.

Raley's Supermarkets, a chain with more than 130 stores across California and Nevada, provides its pricing and merchandising team with the on-demand predictive modeling solution from KSS Retail. ABC Fine Wine and Spirits, a fine wine and spirits merchant, and Gigante Supermarkets, one of Mexico's largest supermarket operators, also use KSS Retail. Ball's Food Stores, operator of Hen House and Ball's Price Chopper grocery stores, went live with KSS in May 2007. The application offers insight into how consumers perceive Ball's pricing and promotions.

The Brookshire Grocery Co., operating in the southern United States under four banners, has embraced the DemandTec Price solution to optimize and manage everyday prices throughout its 155-store chain. A DemandTec price optimization application also is in progress at Bi-Lo, which operates more than 300 supermarkets in the southern United States under the Bi-Lo, Bruno's and Food World banners.