DemandTec Customer Case Study: Fresh Direct


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DemandTec Customer Case Study: Fresh Direct

  1. 1. A DemAnDTeC CusTomer suCCess sTory Managing Pricing Strategically at FreshDirectCusTomer overview opportunity FreshDirect is a pure play e-commerce retailer. As such, the data available to themFreshDirect is a leading profitable provides a unique opportunity for competitive differentiation. “We know precisely everyonline grocer in the U.S. with purchase for every customer, and a lot of surrounding behavioral data. We also havecustomers in New York, New absolute compliance with all our pricing changes with absolutely no effort,” said KeithJersey, and Connecticut. It is Vertrees, Manager, Merchandising Operations for FreshDirect.known for its fresh-from-the-farmfoods and brand name groceries at While FreshDirect is able to offer lower prices due to its operational assets, includingeveryday low prices, all delivered to some of the industries’ best food experts and a state-of-the-art distribution facility, thecustomers’ doors. Every morning areas it operates—Manhattan, and the greater New York metro area—is an area ofFreshDirect’s food experts rate all intense competitive pressure.produce and seafood, giving each FreshDirect had a unique opportunity to leverage its data and allow it to compete moreitem a Daily Quality Rating to help effectively. Thus, FreshDirect decided it needed a price optimization solution andcustomers choose what is best and DemandTec’s Everyday Price Optimization software service on the DemandTec network fitin-season. FreshDirect customers the bill.can enjoy more than 600 entreesand side dishes, made fresh daily by DemandTec solutionprofessional chefs using the finest Before selecting DemandTec, FreshDirect conducted a thorough evaluation of the market.and freshest ingredients. FreshDirect selected DemandTec for three key reasons: n DemandTec utilizes data at the individual transaction level, enabling FreshDirect to understand differences of individuals customers or specific zip codes. n DemandTec provides a high degree of usability and control. Specifically, DemandTec is extremely flexible with its ability to change and edit data within the application. Likewise,CompAny snApshoT DemandTec makes it easy to create customer groupings on the fly, and easily write, modify, and apply business rules at various levels within the solution.n n DemandTec services and solutions are delivered in a SaaS business model, providingn Market Sector: Online Grocery automatic quarterly releases with new functionality common across the customer base.n Geography: The Greater New York Thus, FreshDirect benefits from all the requests of the vast DemandTec customer base metro area and is always on the most current release. FreshDirect chose to deploy Everyday Price Optimization to manage pricing on an ongoing basis. FreshDirect maintains fairly high gross profit margin targets, and the DemandTec solution would help find products where it could capture some margin increase based on how sensitive a product is to price changes and the competition in the local market. FreshDirect is known for providing high quality fresh products at reasonable prices. Its business was built in Manhattan, and has proven quite sticky due to the mix of service and quality of their fresh goods. In Manhattan, it is able to make up margin on things like cases of water. The nature of consumer demand in the suburbs is quite different. In the suburbs, FreshDirect gets customers hooked on convenience and quality which is a unique differentiator in those markets. Using DemandTec, FreshDirect has the ability to address the needs of the different markets and to simulate different scenarios allowing the pricing team to see the results of a pricing decision before it ever hits their
  2. 2. CusTomer suCCess sTorymore than a Client-vendor relationship“The relationship with DemandTec is so much more than the typical vendor-customerrelationship,” said Vertrees. “DemandTec is committed to our success which isdemonstrated in large part in the form of the ongoing support we get from the professionalservices team which ensures we are getting the full value from our investment.Since FreshDirect has unique data available to them, especially in the fresh space, it haspartnered with DemandTec’s science team to leverage that data in the DemandTec models.For a bricks & mortar retailer there is little data around the quality of produce, and what theshopper sees impacts buying behavior. For an online retailer, the shopper experience isvery different. FreshDirect grades its produce and communicates the quality via the website.Because of the transparent experience, that is consistent for all shoppers, they can use thedata they collect around perishables in the DemandTec models as indicators of consumerdemand. This means that FreshDirect can optimize the prices of perishable categories,which is not the norm for most grocers. All this leads to the ability for FreshDirect to useprice optimization for perishable categories, where that is not the norm for most grocery “The quality of our dataretailers. “We are always on the cutting edge of optimization,” said Vertrees. provides us a uniqueGaining merchant Buy in: The Key to successThe FreshDirect pricing team had prior experience implementing a pricing solution, and opportunity to tap into theknew that one of the toughest challenges would be gaining merchant buy-in. They knew power of price optimization.they’d need to prove the solution’s capabilities through a test case to gain trust. FreshDirect DemandTec has proven tochose their flagship 4-Minute Meals, which are fresh, packaged, microwavable meals with a be the right partner for thisthree to five day shelf life. journey.”The first step was to prove out the basic models. FreshDirect looked at prior purchase Keith Vertreesbehavior and could see based on empirical data that the 4-Minute Meals were – in general Manager, Merchandising Operations– inelastic. This was consistent with what was found by the DemandTec models, and was a FreshDirectstep in building acceptance of the new solution.The next step was to scope out a few scenarios to test some hypotheses. The generalobjective for the 4-Minute Meals category was to increase revenue and margin withouthurting units. The pricing team partnered with the merchants to scope out a few hypothesesto test.A key concern for the merchants was to maintain price perception. The 4-Minute Mealswere priced in buckets—$5.99, $6.99, $7.99, $8.99, and $9.99—and one hypothesis to betested was whether the buckets were crucial to price perception. After analyzing a numberof scenarios, FreshDirect determined that rather than changing the price of every product,they could best achieve their goals by keeping the same price buckets and moving productswithin those buckets.Delivering resultsWith DemandTec, FreshDirect is now able to optimize categories, improve their competitiveposition, and quickly react to cost and competitive changes—all from intuitive, easy-to-navigate screens. This allows FreshDirect to better manage operational pricing issues,including managing pricing relationships such as line groups, good-better-best strategies, aswell as size and brand relationships.The project has met expectations, and those expectations were high. They have consistentlyand predictably seen a lift on profit without negatively affecting units. FreshDirect has seena nearly 1 percent improvement to margin while simultaneously improving their competitiveposition. They are fully on target to meet their financial objectives and have done so in apredictable fashion. DemandTec, Inc. One Franklin Parkway, Building 910 n San Mateo, CA 94403 tel 650.645.7100 7/11