Retail Pricing Perspective

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A perspective talk on Retail Pricing I have given at Indian Institute of Management - Bangalore in 2011 and 2012

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Retail Pricing Perspective

  1. 1. March 2012 Bangalore, IndiaPerspective on Retail PricingIIMB Discussion SessionAmit Kapoor
  2. 2. Context • 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 abroadAmit KapoorMarch 2012 2
  3. 3. Retail Pricing Perspective • Why is it Important? • What are the Challenges? • What are the Approaches?Amit KapoorMarch 2012 3
  4. 4. Importance – Capabilities Lens Strategic Consumer Insight & Planning, Space Value Creation / Format Strategy & Marketing Strategy Pricing Policy Commercial Category Management (Assortment / Range, Price, Pricing Structure, Promotion, Merchandising, Supplier, Private Label) Price Level, Price Communication Executional Demand Operations Customer Pricing Execution, Planning & & In-store Service Price Metrics Inventory Mgmt. ExecutionAmit KapoorMarch 2012 4
  5. 5. Importance – Profitability Lens • Location # of visitors • Format / Concept footfall • Advertising / Offering Customers • Assortment • Price/promotions % buyers • Merchandise / Layout Sales conversion rate • Service/Loyalty No items • Assortment • Price / Promotion / Loyalty Basket • Merchandise / Layout ValueRetail Average item • Format / ConceptMargin price • Price / Promotion • Assortment/PL Merchandise • Suppliers • Supply Chain Employees • Service level, unit cost, productivity Costs Point of Sale Space • Location, use, turnover (POS) Other • Maintenance, cleaning, utilities,… CentralAmit KapoorMarch 2012 5
  6. 6. Importance – Impact Lens Retailer Cost Breakup Key Retail Profitability levers Net Margin 2.7% Addressed through cost Fixed 24.7% efficiency initiatives Cost Elasticity Net Margin Increase =-0.25 Variabl e Cost 72.6% Elasticity = -1 (Revenue Neutral)Amit KapoorMarch 2012 6
  7. 7. Challenges – Typical pricing capability gaps • Policy and Level • Insight • Tool Box • Process and GovernanceAmit KapoorMarch 2012 7
  8. 8. Policy Challenges • 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 customerAmit KapoorMarch 2012 8
  9. 9. Policy Challenges – Setting the Right Price  Customer price sensitivity  Non-product offering (e.g. service, Willingness-to-pay convenience) (Value pricing)  Relationship with customer Upper Bound  Meet competitive threats Retail How much  Drive foot fall Price value to share Desired customer  Increase penetration or market with the Level behaviours share customer?  Encourage switching Lower Bound  Actual cost-to-serve by customer segment (DPP) Cost-to-serve  Customer buying behaviour  Channel / customer service costsAmit KapoorMarch 2012 9
  10. 10. Insight Challenges – Understanding Elasticity Category: Chest Freezer Category: DVD Camcorders  Elasticity = -0.12  Elasticity = -4.68  In-elastic category  Highly elastic Sales Volume (‘000s units) Sales Volume (‘000s units)  1% change in Price will result in  1% change in Price will 0.12% change in Sales Quantity result in 4.7% change in Sales Quantity Log (SQ) = 5.7 - 0.12 * Log (ASP) + 0.97 * Log Log (SQ) = 17.3 - 4.68 * (Seasonality) Log (ASP) + 0.64 * Log (Seasonality) Average Selling Price (£/unit) Average Selling Price (£/unit)Amit KapoorMarch 2012 10
  11. 11. Insight Challenges – Not that easy! • Elasticity • Demand Model • Probing or Trials • Pooling with and without cross-elasticity • Lifecycle Price Decay Curves • Cannibalization Factors • Conjoint AnalysisAmit KapoorMarch 2012 11
  12. 12. Tools Challenges Revenue Customer Relationship Demand Based Management (CRM) Management (DBM) Sales, Marketing, Price, Promotion, Range, and and Service Merchandising Siebel, Oracle, Salesforce.com DemendTec, SAP Khimetric, SAS, JDA, KSS Retail, Oracle Profitlogic POS Enabled Enterprise Relationship Supply Chain DDSN Management (ERP) Management (SCM) Finance, HR, IT, and Purchasing, Logistics, Inventory and Manufacturing Distribution SAP, Oracle, Peoplesoft JDA/i2/Manugistics, SAP Cost Efficiency OptimizationAmit KapoorMarch 2012 12
  13. 13. Process and Governance Challenges 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 themAmit KapoorMarch 2012 13
  14. 14. Approaches that work • 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: ZaraAmit KapoorMarch 2012 14
  15. 15. POS driven Analytics – Tesco / Dunnhumby • Segmented customer base + Loyalty tiers • 7 million coupon price promotion; 10x effectiveness • Linking to POS analytics to availabilityAmit KapoorMarch 2012 15
  16. 16. Consumer Centric / Geographic– Best Buy CDs, Home Departments DVDs Theater Jill: More serviceJill (Suburban throughout the storeMom) Barry: Self sufficient inBarry (Affluent many, very focused onCustomer) home theaterBuzz (Early Buzz: Don’t bother me, I’m almost through level 12!Adopter) Ray: Show me the latestRay (Family entertainment deviceMan) BBFB: Product/solutionBBFB specificOtherTargetsAll other Low High “Bought” “Sold” Amit Kapoor March 2012 16
  17. 17. Managing Price Expectation - Trolley Pricing Destination e.g. Milk Price Match / Routine e.g. Category Lower Cereals Importance (frequency, type, Competitive Convenience e.g. role) Pricing Confectionary Margin plus Occasional Pricing e.g. Flower Background Core Key Value Lines Geographic Importance (competition Product Importance intensity) (role, comparability)Amit KapoorMarch 2012 17
  18. 18. Managing Price Perception – John Lewis • 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 pricesAmit KapoorMarch 2012 18
  19. 19. EDLP Model – Aldi Discounter Provide EDLP prices to consumers Extend Invest in competitive threat Price Drive Volume Share MaintainIncreased returns Netto Shareholder Margin Buy for 800 -1000 SKUs Less with 15x volume Drive Efficiency EDLC operation with 5 -8% costAmit KapoorMarch 2012 19
  20. 20. Shaping Demand – Zara Specialty Retailer 55% Greater 120 120 Margin Regular Price 100 100 ~15% Price advantage 80 80 $ (Indexed) $ (Indexed) 60 Mark down 60 40 20% cost disadvantage 40 20 20 0 0 0 100 200 300 400 500 600 700 800 0 100 200 300 400 500 600 700 800 Sales / Sq Foot Sales / Sq Foot COGS MarginAmit KapoorMarch 2012 20
  21. 21. Final Thoughts • 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 You can access this file online at goo.gl/dPNph If you have any questions, please contact me at me@amitkaps.comAmit KapoorMarch 2012 21

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