Retailers are under pressure to improve profitability and gain a greater percentage of spending, so its not surprising that more firms realize the value of price optimization to increase same-store sales and improve their competitive position. But how can retailers best optimize pricing?

Experts advise them to move away from a gut-feel approach to a data-driven pricing strategy. That should lead to the right offer, at the right location, at the right price, with the right range of products to gain a greater share of shoppers wallets. Karen Dutch of Revionics (a provider of price optimization solutions), comments, Pricing needs to be strategically driven and technology-enabled. Demand-based optimization provides a granular view of shopper and competitor behavior, blended with business and financial strategy and rules, enabling retailers to surgically execute competitive positions while maximizing profit opportunities.

One retailer that has validated its approach to price optimization is Roundys Supermarkets, the $4 billion operator of 150 stores in Wisconsin and Illinois under four banners: Marianos, Metro Market, Copps, and Pick n Save. Were looking to increase sales and margins, while improving price perception, states Laura Roehl, vice-president of pricing. Those goals can be at odds with each other, particularly in the short term. This is where we saw the need for a data-driven tool. We also wanted to improve price integrity and consistency.

Roehl cites five lessons from Roundys price optimization work with Revionics, which enabled its stores to thrive in hypercompetitive markets: For a smooth transition, pre-work and setup are crucial prior to implementation. A review suggests details using knowledge (promotional plans, etc.) to complement pricing strategy. Fine-tune the tool after initial installation for better results. Document and measure results for management review. Price optimization provides visibility to elasticity in a way that was previously unavailable. Roundys effectively uses the solution with a customer-focused approach, notes consultant Mark Kelso, of Price Revolution, who spoke with Roehl at FMI Connect. Their process has resulted not only in improvements in unit movement, sales, and gross margin, but has also reduced the amount of time spent on developing price recommendations.

SAS lists several other retailers that have benefited from deploying a price optimization strategy: A midsize North American grocer integrates regular price and promotional price activity, letting the firm take into account promotional activity across a timeline to achieve overall pricing goals. A European grocer uses price optimization as part of its category review process. It was able to identify a combination of price increases and price decreases to meet category financial objectives.

A North American regional grocer used localized segmentation and promotion optimization to develop new circulars customized to neighborhood markets, leading to an increased revenue of 3 to 5 percent. Howard Langer, of Dunnhumby, advocates customer-centric pricing because consumers respond to prices differently. Thus, he notes that retailers need to understand which customers buy which products, and then set pricing strategies from there. Instead, most retailers evaluate what competitors are doing with pricing and product costs. This compare-and-contrast strategy will no longer work, as it no longer resonates with the consumerwho expect personalized experiences. Until grocery retailers customize pricing based on their customers behavior and shopping habits, theyll continue to fail to meet the consumers needs.

According to NCRs Todd Michaud, the biggest mistake a retailer can make is adopting price management and optimization systems without a price strategy known, understood, and thought through before, during, and after implementation. He says pricing systems are typically underused by firms, with most using only a fraction of available technology, due to a lack of comprehensive pricing strategies. This can include competitive and loyalty-pricing strategies, private label positioning, cannibalization policies, zone nuances, ending-numbers price thresholds for changes, and category-specific strategies.

Questions:

1. What retailer activities are involved with a price optimization strategy?
2. Why dont more retailers use price optimization strategies?
3. How does price optimization relate to the concept of category management?
4. How could a small retailer engage in a price optimization strategy?