In Depth Look at Retail Pricing Practices-Pricing_2013-RSR

7/27/2019 In Depth Look at Retail Pricing Practices-Pricing_2013-RSR

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Tough Love: An In Depth Look at Retail

Pricing PracticesBenchmark 2013

Nikki Baird and Paula Rosenblum, Managing Partners

April 2013

Sponsored by:


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Executive Summary

Retailers continue to escalate the number of price changes they send to stores and other

channels. Their field human resource infrastructure groans under the sheer weight of the work

effort involved in keeping signage and tags up to date, but pressured by perceived consumer

price sensitivity and increased competitive pressures, these price changes continue.

This escalation continues despite a dearth of information about the potential impact of changes to

price and even an analysis of the actual impact of tactical price changes. We found this stunning.

Key Findings

While a majority of retailers continue to increase the number price changes they send to

stores and other channels, those who underperform in year over year price changes are

leading the charge, with fully 90% reporting at least some increase over the past three

years. Sadly, only 15% report aggregate gross margin improvements for the critical

holiday season.

The business challenges driving these price changes come from customers, competitorsand shareholders. Fifty-seven percent of respondents report increased consumer price

sensitivity as a top-three business challenge, 41% report increased pricing

aggressiveness from competitors, and 40% report the need to get a better return on

inventory investment through pricing as top issues.

It appears as though retailers have learned to live with showrooming and price

transparency. They are less worried this year about damage to their zone pricing policies

(21% this year vs. 34% last year), and a plurality (38%) believe their policies to manage

prices across channels are effective. Theyve seen and survived showrooming, and with

a few high profile exceptions, have opted to be competitive rather than price match

(38% vs. 17%).

Forty-two percent report the need for cleaner data as a top-three organizational barrierto more effective pricing practices. The same number cites resistance to change from

stores as a top-three issue. A slightly smaller percentage (40%) believes they need better

skill sets to improve execution. This is certainly credible, as a plurality report they can

neither predict the impact of price changes they make, nor truly analyze the effectiveness

of those price changes after the fact.

The top technologies currently being evaluated include markdown forecasting and

planning (24%), promotion optimization (23%), regular price optimization (20%), inventory

management/availability as a price driver (23%), and price intelligence (18%). A

significant number are exploring or budgeting for these same technologies.

BOOTstrap Recommendations

We recognize that we are unlikely to stop the seemingly endless barrage of promotional activity

retailers engage in, but we strongly recommend improving measurement tools, both before and

after the fact. That measurement should go beyond just the actual aggregate gross margin

improvement or sales lift associated with price tweaking, but also include the cost to store

operations and other personnel to execute those price changes. As in prior years, we hope to see

retailers return to what weve called the virtuous pricing cycle, Plan-Execute-Measure. This

seems overtly simplistic, yet its what the data is calling for.


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Table of Contents

Executive Summary ........................................................................................................................... iResearch Overview ......................................................................................................................... 1

Strategy vs. Tactics, and Plans vs. Execution ............................................................................. 1

Retail Winners: Why Performance Matters .................................................................................. 2Were Making Good Time, but We Might J ust be Lost ............................................................. 2

Methodology................................................................................................................................. 3

Survey Respondent Characteristics ............................................................................................ 3

Business Challenges ....................................................................................................................... 5Pressure Comes from Consumers and Shareholders ................................................................. 5

Winners Seek Brand Protection, Laggards Look Over their Shoulders ...................................... 5

Opportunities ................................................................................................................................... 8Margins, Sales, and the Economy ............................................................................................... 8

The Margin Story ......................................................................................................................... 9

Zone Pricing and Transparency - Friends at Last? ................................................................... 10

Channel Conflict and Mobile: Reining in Showrooming ............................................................. 11

The Promotions Conundrum ...................................................................................................... 12Organizational Inhibitors ................................................................................................................ 14

If Price is our Lever, Why Cant We Always Execute? .............................................................. 14

How Can We Get Past these Concerns? .................................................................................. 15

Operational Challenges Are Surprising ..................................................................................... 16

Bottom Line: A Wall of Confusion .............................................................................................. 17

Technology Enablers ..................................................................................................................... 18The Customer Data Silver Bullet................................................................................................ 18

Customer Data - A Laggards' Tale ............................................................................................ 19

Making It All Happen .................................................................................................................. 20

Technology's Performance Gap ................................................................................................ 21

A Note About Hosted Solutions ................................................................................................. 23

BOOTstrap Recommendations ..................................................................................................... 24Resisting Discounting's Siren Call ............................................................................................. 24

Measure the Impact of Price Changes ...................................................................................... 24

Corollary: Measure the Customer Impact of Conflicting Channel Prices................................... 25

Faster and More is Not Better - Measure the Cost to Stores .................................................... 25

Appendix A: RSRs Research Methodology .................................................................................... aAppendix B: About Our Sponsors.................................................................................................... bAppendix C: About RSR Research .................................................................................................. d


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Research Overview

Strategy vs. Tactics, and Plans vs. Execution

Why would RSR use the term Tough Love as part of the title of its seventh annual Pricing

Benchmark? Because the data tells us that while some retailers have succeeded at high stakes

promotion wars driven by the self-fulfilling prophecy of consumer price sensitivity, others are

failing sometimes spectacularly even as the shopper becomes more and more accustomed to

ever more dramatic and frequent promotions.

And heres the real kicker: Those who over-perform on year-over-year comparable sales are

far more likely to stay the course in their pricing strategy than their competitors . Their

competitors continue to up the promotions ante, yet as well see, they dont get the sales or

margin kick that they crave. Well explain the difference between Winners, Average Performers

and laggards shortly, but in the meanwhile lets take the following data point as an example:

staying the course on pricing strategy vs. becoming more promotional (Figure 1)*.

Figure 1: Chasing Low Price vs. Staying the Course

Source: RSR Research, April 2013(*Figures do not add up to 100%)

Of course, just deciding to avoid promotions doesnt guarantee success. At least one high profile

failure has shown that simply announcing an end to promotions without adequate explanation and

preparation is doomed. But thats not a strategy failure: its a series of tactical miscues.

Similarly, plans to execute a high-low pricing strategy, hallmarked by ever-increasing pricechanges, create operational issues in stores and other channels and confuse and frustrate

consumers.

With that as backdrop, well take a look at the state of the pricing union, based on responses from

more than 100 retailers around the world. Some of what we say may be hard to hear, which is

why weve called this report Tough Love: An In-Depth Look at Retail Pricing Practices. For

many of us, its time to stop competing on other companies turf, and focus on finding our own

niche. As we said last year, No one wins in a race to the bottom. Thats still true.

24%

32%

40%

9%

40%

15%

We have become more promotions driven Our strategy has not changed

How has Your Pricing Strategy Changed Overthe Past Three (3) Years?*

Retail Winners Average Performers Laggards


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Retail Winners: Why Performance Matters

Our definition of Retail Winners is straightforward. We measure retailers by year-over-year

comparable store/channel sales improvements. Assuming industry average comparable store/

channel sales growth of three percent, we define those with sales above this hurdle as

Winners, those at this sales growth rate as Average, and those below this sales growth rate as

laggards or also-rans. Throughout much of RSRs research we find that Winners dont merelydo the same things better, they tend to do different things. They think differently. They plan

differently. They respond differently.

Laggards also tend to think differently. They may have spectacular vision, but often fail on

execution. They may forget the power and breadth of choices todays customer has. They may

fail to re-invent themselves when it becomes obvious their existing business model is no longer

working. They dont change their business processes in an effective manner, and so they either

eschew technology enablers, or dont gain expected Return on Investment on those they DO buy.

So lets take a look at some additional differences between Retail Winners and their peers when it

comes to pricing practices and their outcomes. Weve already established that laggards have

been more likely to increase their promotional activity than Retail Winners. What has the outcomebeen, particularly for the all-important holiday season?

Were Making Good Time, but We Might Just be Lost

As well see later in this benchmark, retailers hope to achieve two primary objectives through their

pricing practices: improving top line results, and improving selling gross margin. How did our

respondents fare during the all-important holiday season?

Figure 2: Were Moving Quickly, But to What Purpose?

Source: RSR Research, April 2013

The data is clear. Even as laggards continued to ramp up their promotional activities, for at least

half, their margins have declined, and their sales have failed to improve (again: this is our

definition of laggards).

27%

58%

15%

32%

50%

18%15%

40%45%

Gone up (improved) Remained the same Gone down

Thinking of Holiday 2012, How Has Your SellingGross Margin Changed?



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And while all retailers continue to ramp up the sheer number of price changes they send to stores

and other channels, we can see from Figure 3 that laggards accelerate at a faster pace.

Figure 3: Act ivi ty Continues to Escalate


Fully 90% of laggards continue to increase the number of price changes they send to stores and

other channels. This adds increased burdens to already overtaxed store operations personnel

and still hasnt achieved the desired goals1.

Methodology

RSR uses its own model, called the BOOT, to analyze Retail Industry issues. We build this

model with our survey instruments.Appendix Acontains a full explanation of the methodology.

The BOOT model helps us better understand the behavioral and technological differences that

drive sustainable sales improvements and successful execution of brand vision.

Survey Respondent Characteristics

RSR conducted an online survey from January - April 2013 and received answers from 134

qualified retail respondents. Respondent demographics are as follows:

J ob Title:

Senior Management (CEO, CFO, COO) 36%

Middle Management (VP, Director, Manager) 44%

Individual Contributor 49%Other 4%

2012 Revenue (US$ Equivalent)

Less than $50 Million 37%

$50 - $249 Million 19%

$250 - $999 Million 11%

1Add reference to WFM or Merch report on payroll to sales figures here

36% 36%

24%

3%

46%

28%24%

2%

40%

50%

5% 5%

Increased significantly Somewhat increased Stayed about the same Decreased

How Has the Number of Price Changes Changed

Over the Past Three (3) Years



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$1 - $5 Billion 15%

Over $5 Billion 18%

Products sold:

Fashion / Short Lifecycle/Seasonal 31%

Durable Goods / Consumer Electronics 27%

Basics/Replenishment Goods 27%Perishables 15%

Geography (Headquarters vs. Retail Presence):

Region HQ Operate

USA 59% 67%

Canada 7% 27%

Latin America 2% 15%

UK 2% 15%

Europe 16% 26%

Middle East 3% 13%

Africa 2% 9%

Asia/Pacific 9% 20%

Headquarters/Retail Presence:

USA 56% 64%

Canada 10% 35%

Latin America 3% 20%

UK 2% 15%

Europe 19% 30%

Middle East 4% 14%

Africa 0% 8%

Asia/Pacific 6% 21%

Year-Over-Year Sales Growth Rates (assume average growth of 3%):Better than average (Double digit growth) 17%

Better than average (Single digit growth) 29%

Average 39%

Worse than average (laggards) 15%


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Business Challenges

Pressure Comes from Consumers and Shareholders

Last year we expressed a certain befuddlement at retailers fears of consumer price sensitivity

without a lot of statistical data to support it. This remains our point of view, and has been

supported by numerous consumer surveys.2 Yet it remains the most frequently cited business

challenge among our retail respondents (Figure 4), and retailers react accordingly.

Figure 4: Year over Year Pr ic ing Chal lenges A Focus on Inve ntory Investment


Having said that, we find retailers are almost equally concerned about satisfying shareholders.

Adding an answer option that focused on return on inventory investment yielded strong results.

Forty percent of respondents highlight this as a top-three concern, clearly trumping consumer

price sensitivity, competitor pricing aggressiveness and price transparency. This concern is

consistent across retailer performance levels, revenue or retail sub-vertical. Pricing is used as a

lever to boost sales, gross margin and clearly, turn.

Other business challenges vary significantly depending on retailer performance, however.

Winners Seek Brand Protection, Laggards Look Over their Shoulders

One key difference between Retail Winners and laggards is often found in their perceived

business challenges. Winners tend to look within, while laggards tend to constantly scan the

competitive landscape. The world of pricing is no exception (Figure 5).

2Insert reference to Daymon study here

18%

9%

27%

22%

47%

42%

51%

67%

13%

21%

25%

25%

33%

34%

40%

41%

57%

Respond to segment blurring (competition comingfrom unexpected places)

Need to provide more localized pricing

Need to provide consistency in price acrosschannels

Increased promotional intensity of competitors

Increased price transparency the impact ofcomparative price shopping

Need to protect our brands price image

Need to get better return on our inventoryinvestment through pricing

Increased pricing aggressiveness from competitors

Increased price sensitivity of consumers

Top Three (3) Strategic Pricing Business Challenges

2013 2012

N/A


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Figure 5: Winners Look Within, Laggards Look over Their Shoulders


Winners are far more concerned about protecting their brands pricing image, whether they think

of themselves as the low-price or premium product leader. Laggards, on the other hand, worry

about competitor pricing aggressiveness and new competitors emerging in unexpected places.

Dollar Stores growing investment in food and their increasingly direct competition to

supermarkets and Mass Merchants clearly comes to mind in that regard. So does the Mass

Merchant investment in Consumer Electronics, as both online and brick and mortar retailers

challenge the category killers. Yet its interesting to look at the most significant differences across

product sub-verticals (Figure 6).

Figure 6: Surprising Differences in Concerns by Sub-vert ic al


28%

39%

56%

11%

17%

13%

39%

45%

29%

29%

6%

22%

25%

28%

47%

Respond to segment blurring (competition coming

from unexpected places)

Increased price transparency the impact ofcomparative price shopping

Increased pricing aggressiveness from competitors

Need to provide consistency in price acrosschannels


Business Challenges - Differing by Performance


64%

44%

67%

53%

24%

56%

38% 40%

48%

24%29%

40%

Fashion/Seasonal Basics/Replenishment Durable Goods &Consumer Electronics

Perishable goods

Top Three (3) Difference by Sub-vertical

Increased price sensitivity of consumers Increased pricing aggressiveness from competitors



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One would think that those selling durable goods and Consumer Electronics would be

most concerned about The Amazon Effect. Enough retailers have certainly highlighted this

issue in their Quarterly financial reports. Yet, they are as concerned about consumer price

sensitivity as retailers selling fashion merchandise, who are clearly threatened by fast

fashion retailerslike H&M, and Forever 21 on the one side, and Mass Merchants like Target on

the other.

Given all this, its somewhat surprising that when asked about their position on commoditization

and margin erosion, 55% report We have to operate within an extremely price competitive

environment far more than any other issue including the impact of price transparency.

Within this context, lets take a look at the opportunities retailers seek to leverage from their

investments in price and supporting tools and processes.


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Opportunities

Margins, Sales, and the Economy

The top three opportunities for pricing to contribute to retailers' business success come from

improving margins, improving top-line sales, and increasing market share in key categories.

However, clearly margin beats all (Figure 7).

Figure 7: Back to the Future: The Margin Opportunity


Year over year, "create more profitable promotions" has been on a relative decline as an

opportunity since 2010. The opportunity peaked at 45% in 2011, down to 29% today. The

conflicted relationship between retail pricing and promotions only grows more complicated - as

we found in the business challenges section above, retailers feel strongly that they must operate

in an extremely price sensitive environment, but even though they are sending more price

changes to stores without knowing the impact of those changes, they somehow feel more and

more confident about promotions overall.

The importance of a price competitive image as a pricing opportunity is also on the decline, from

41% in 2010 to 28% today. However, using price as part of creating a seamless cross-channel

experience is growing in importance from 12% in 2010 to 26% today. This is still a relatively lownumber, placing it near the bottom of the list of opportunities. Winners put the most value on a

seamless cross-channel experience - 28% vs. laggards' 18%.

Digging deeper into the details:

Winners also place more value on price as an opportunity to better match demand

to supply, with 38% of Winning respondents vs. 19% of average performers and 24% of

laggards.

23%

25%

26%

26%

28%

29%

31%

39%

60%

Gain margin advantage through more dynamicpricing

Better matching of demand and product supply

Provide a more seamless cross-channelexperience to customers

Provide more localized offerings to customers

Create a more price competitive image for ourcustomers

Create more profitable promotions

Increase market share for key categories orproducts

Improve top-line sales

Improve margins

Top-3 Pricing Opportunities


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On the other hand, 35% of laggards value price as a way to present a more

competitive image to customers vs. 22% of Winners.

On the vertical front, Fashion retailers drive the interest in price's role in better

matching supply and demand - not surprising, considering their overriding interest in

managing sell-through. Grocers, also no surprise, are most interested in driving

profitable promotions.

The largest retailers are most interested in using price as part of their localization

strategy, which is another theme - that retailers in t his study seem to think they have

a handle on the channel conflicts created by zone pricing . But while 56% of $5B+

retailers say they value localized pricing as an opportunity, only 38% say that price

creates an opportunity within a seamless cross-channel experience.

The Margin Story

The margin story by no means begins in 2013. To fully understand the relationship between

margin as an opportunity and price's role in driving margin, you have to go back to the dark days

of the economic downturn. As the business environment grew more challenging, retailers

increasingly looked to price to shoulder the dual burden of margin and sales - with that interest

peaking in 2010.

Since then, retailers' interest in using price to drive top-line sales has been on the decline, falling

from 58% in 2010 to 39% in 2013 (Figure 8).

Figure 8: Margin as the Winners' Story


According to survey respondents, everyone seems to have an interest in using price to improve

margins. But much more so than Winners, laggards are the respondent pool that drives

interest in also using price to increase top-line sales . Laggards aren't thinking that they have

the market power to raise prices - this is about finding ways to cut prices further: 41% cite

growing market share as a top-3 opportunity (vs. 22% of Winners) - clearly a hope that if they

lower prices they can grab market share and drive revenue as a result.

58%

49%45%

39%

82%

51% 52%60%

2010 2011 2012 2013

Top-3 Pricing Opportunities:Year over Year

Improve top-line sales Improve margins

65%

36%

28%

59% 56%

66%

Laggards Average Winners

Top-3 Pricing Opportunities:The Winner's Perspective

Improve top-line sales Improve margins


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Additional trends related to margin:

By vertical, everyone wants to improve margins, but top-line sales are a

basics/replenishment story.

The smallest retailers (


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Additional perspectives:

Winners and laggards play out the larger story on a smaller scale - 17% of Winners

believe zone pricing has been damaged by transparency vs. 31% of laggards.

Conversely, 47% of Winners believe they have effective price conflict policies vs. 13% of

laggards.

From a vertical perspective, fashion is the extreme of the figure above - 14% believethat zone pricing plans have been damaged by transparency, and 45% believe they have

effective policies in place to manage price conflict across channels.

Perishable goods retailers are most afraid of impact to their zone pricing strategies,

mostly because they least agree that they have policies in place to manage conflicting

prices.

Channel Conflict and Mobile: Reining in Showrooming

Part of the reason for retailers' resurging confidence around zone pricing may be their shifting

opinions about mobile price comparison or "showrooming" practices. Retailers definitely report

seeing it - 43% of respondents reported that they had never encountered showrooming in 2011,

and only 27% reported the same this year (Figure 10).

Figure 10: Showrooming Ain't What It Used To Be


But as more and more retailers encounter the behavior, their confidence in what to do about it

seems to increase. In the news we saw more and more reports of retailers like Walmart and

Target adjusting their price-match policies in stores to include certain online retailers likeAmazon.com. But the biggest differences in approach are revealed when looking at the results by

performance:

Laggards drive the "Ignore it" category - 18% vs. 9% of Winners. Laggards are also

more likely to pri ce match - 24% vs. 16% of Winners.

Average performers are most likely to be competitive - 42% vs. 38% of Winners and 29%

of laggards.

9%11%

43%

26%

7%

12%

39% 39%

14%17%

27%

38%

Ignore it Price match We haven't seen ityet

Be "competitive"

Mobile Price Comparison Policies

2011 2012 2013


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Winners are most likely to say they haven't seen any showrooming yet - 34% vs. 18% of

average performers and 29% of laggards. The average performers appear to be

getting squeezed - they are not necessarily positioning themselves against

laggards as low price competitors, but they don't necessarily have the service or

message elements that help them justify not price matching.

By revenue and vertical:

The smallest retailers choose to ignore price comparisons - 24% ignore it vs. only

7% of largest retailers, and 10-13% among middle revenue bands.

Middle revenue bands are most likely to respond by being competitive. - 56% of $50-

249M and 50% of $250-999M retailers.

Largest retailers are most conflicted - 33% say they aim to be competitive, but another

27% say they price match (highest among revenue bands). This does reflect the trend we

saw in 2012 where the largest retailers adjusted their competitive position in stores to

include price matching against online retailers.

By vertical, perishable goods retailers are the least impacted by mobile price comparison,

which, given the nascent online grocery business, is no surprise. And absolutely no

durable goods retailers report that they ignore it , vs. 14-26% of peers - a reflection of

the near-crisis state of some category-killing retailers as they get picked off on breadth of

assortment online, and depth of assortment in small specialty.

Even from industry participants, we have heard many a tale of woe of a retailer-shopper

relationship destroyed by channel conflicts and the retailer's subsequent failure to resolve that

conflict in any rational (to the consumer) manner. Retailers seem to feel that their advertised

policies around mobile price transparency are enough to avoid further damaging their credibility -

or conversely, that the practice doesn't happen often enough that it's worth changing their whole

price strategy over.

Will this conclusion hold? It depends in large part on consumer behavior - if continued price

transparency takes a toll, or if the showrooming "freak out" of 2012 ultimately fades into

insignificance.

The Promotions Conundrum

While retailers have expressed a lot of ambivalence about their promotions capabilities in the

past, in 2013 their confidence has grown, particularly around the level of granularity of their

promotions, where 15% agreed they achieve the appropriate level of granularity in 2012 vs. 30%

in 2013 (Figure 11).


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Figure 11: Promotions Should Be Gett ing Better


Overall, respondents express the most confidence in being able to react to competitors, rather

than customers. And despite their confidence in their promotions capabilities holding steady or

improving, as well see later in this document, clear examples of places where retailers expressed

issues specifically around managing and measuring promotions.

Promotions, like margins, is also a Winners' story:

43% of Winners feel confident in their promotional effectiveness vs. 25% of laggards. And

47% of Winners have a process in place to coordinate promotions across internal

organizations vs. 20% of laggards. 50% of Winners vs. 38% of laggards are confident that they can respond quickly to

competitors' price changes.

Winners and average performers are 3 times more confident in their ability to

target promotions (32-38% vs. 13% of laggards)

The biggest challenge with promotions is breaking corporate myths. Retailers think they are good

at promotions because mass promotions have worked so well in the past, and because you can

see the lift after a promotion runs. But in today's fragmented marketing world, where "mass"

becomes more and more difficult to achieve, and the retail industry is growing less and less

dependent on store traffic over time, the idea of what a promotion is and what it's supposed to

accomplish is ultimately going to have to change.

There is absolutely no way a retailer can say they are doing promotions well if they can't

coordinate promotions across multiple organizations or channels, and especially if they

have no way to measure the impact of promotion decisions . And in terms of customer

centricity, promotions is the first point in the business where the rubber meets the road - where

the desire to be more customer centric should theoretically manifest itself in some kind of

execution. From this research, retailers clearly aren't there yet.

30%

45%

34%

34%

51%

38%

39%

46%

20%

17%

26%

20%

My company currently targets our promotions at theappropriate level of granularity

We have the ability to respond quickly to competitors'price changes

We have processes in place to manage promotionalplanning across the various organizations within our

company (marketing, category mgr/buyer, forecaster)

My company feels confident that our promotions areeffective overall (improving margin, growing basket,

driving traffic, etc)

Promotions Opportunity

Agree Neutral Disagree


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Organizational Inhibitors

If Price is our Lever, Why Cant We Always Execute?

Weve already established that the number of price changes continue to escalate across the

board, but most sharply among those who under-perform. As we intimated earlier in this

document, this has had profound internal impact.

In aggregate, much like last year, the need to get clean data on past prices, competitor prices and

customer purchase data is a serious constraint. Stores and other channels are becoming more

resistant to change and the skill sets to actually do this right are lacking (Figure 12).

Figure 12: Whats Preventing Us from Being More Effect ive ?


When we look at the details, though, we see significant differences in opinion:

Impressions based on Performance:

Not surprisingly (given their relatively higher number of price changes) laggards meet

primary resistance from within. Sixty-nine percent of laggards report resistance tochange from stores as a top-three organizational inhibitor, vs. 41% of Winners. Similarly,

even the merchants are resistant, with 44% of Laggards reporting this as a top-three

concern vs. 31% of Winners.

For their parts, Winners are most concerned about skill sets and lack of

coordination with marketing (45% apiece).

Average performers are most concerned about their lack of clean price, competitor and

purchase data (47%).

29%

31%

31%

34%

34%

40%

42%

42%

The possibility of negative customer reaction tochanges in our pricing strategy

Resistance to change from Merchandising

We cant execute at the level of granularity thatpricing solutions provide

Lack of coordination with Marketing

Channel organizational structure makes it difficultto coordinate pricing strategies across channels

Lack of the right skill sets

Resistance to change from Stores or otherchannels

Lack of clean price, competitor and purchase data

Top Three (3) Organizational Barriers ImpactingAbility to Implement More Effective Pricing

Practices


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Impressions based on Sub-vertical:

Retailers selling Fashion/Seasonal merchandise most frequently report lack of

coordination with marketing (50%) and possibility of negative customer reaction to

changes (41%) as top-three inhibitors.

Retailers selling basics/replenishable items are challenged by both lack of clean price,

competitor and purchase data and difficult channel organizational structures (42% each).

Retailers selling durable goods and/or Consumer Electronics overwhelmingly cite a

lack of clean price, competitor and purchase data (67%). They also frequently cite lack of

skill sets (43%).

Finally, retailers selling perishables cite three primary internal challenges: executing at a

granular level (62%), a lack of skill sets (also 62%), and resistance to change from stores

(54%) in their top-three internal issues.

Impressions based on Retailer Size:

The smallest retailers ($5 billion) are relatively evenly split on theirtop three concerns, with lack of coordination with marketing and channel organizational

structures (43% apiece) narrowly edging out other concerns.

How Can We Get Past these Concerns?

On one level, there is also not a lot of unanimity among respondents about ways to overcome the

organizational inhibitors they face, but there is one item that is consistently on the top of

everyone's list: the need for improved technology integration tools. This is a bit counter-

intuitive, given that the internal barriers they perceive are all about culture and execution. We can

only tie this to their professed inability to execute at the granular level their systems could

provide, but it still surprising.

Figure 13 shows how this issue has grown just since last year. Clearly, as we said last year,Pricing is no longer an island.


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Figure 13: And What Can We Do About It?


Operational Challenges Are Surprising

No discussion of organizational inhibitors would be complete without at least mentioning

operational challenges in setting prices, and here as well, we found ourselves stunningly

surprised.

How can it be that we continue to increase the number of price changes we send, we rely

on pricing to manage our margin and top lines, and yet almost half of us report we canneither forecast what impact potential pricing decisions will have, nor can we measure the

actual impact those decisions have? Strange as this may sound, this is clearly the state our

retail respondents report (Figure 14).

15%

21%

26%

33%

23%

28%

41%

44%

33%

14%

19%

24%

28%

32%

35%

42%

44%

51%

Best practices for managing channel conflict of prices

Line of business leaders to help change our business processes

Pilot programs in specific stores or regions

Better communication and education of resistant parties ororganizations

Better training to improve pricing skill sets

Tailor a technology solution to my business process and needs

Business process analysis for pricing process improvement

Build up progressively more sophisticated pricing capabilitiesover time

Improved integration technology tools

Top Three (3) Ways you Believe you can Overcome these Barriers

2013 2012


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Figure 14: Were Making Good Time, but We Might Wel l Be Lost


Bottom Line: A Wall of Confusion

The net of all this data comes down to several short bullet points:

Our problems are organizational, but we perceive our solutions as technical We continue tweaking and changing prices while flying blind

Were not quite sure how to use the tools and techniques we have at our disposal

And finally, we may not have the data we need to actually change the outcomes weve

described above

Within that context, lets take a look at how Technology enablers can, have, and will help solve

this difficult situation.

15%

17%

19%

20%

24%

27%

35%

37%

45%

48%

Keeping up with promotional deals btwn buyers &manufacturers

Keeping up with pricing and packaging changes bymanufacturers

Managing promotions across channels

Inability to effectively manage all pricing rules and/orunderstand impact of rule violations

Coordinating with marketing on promotions and offers

Getting access to robust competitive price data

Making sure that stores change prices accurately andtimely

Maintaining visibility into promotional profitability

Measuring the impact of executed pricing decisions

Forecasting the impact of potential pricing decisions

Top Three (3) Operation Challenges in Setting Prices


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Technology Enablers

The Customer Data Silver Bullet

In terms of data elements valuable to a pricing capability, there have been some big shifts over

the last year. Clean demand at a store level, competitors' prices, and clean promotion history

remain at the top of the list, but almost everything based on customer in some way jumped

significantly (Figure 15).

Figure 15: The Customer Bump


Customer purchase history shot to the top 5 on the list, moving from 37% of respondents whorated it as very valuable in 2012, to 54% in 2013. Even customer sentiment gathered from social

media benefited - improving from 17% in 2012 to 25% this year.

Is it a coincidence that in the organizational inhibitors section we identified clean data as one of

the top organizational barriers? We think no. Customer data is typically much "dirtier" than

product data, and notoriously difficult to clean. With this rising importance of all data customer-

related, it's no surprise that retailers also feel the need for stronger tools and skill sets related to

getting and keeping this data clean. Conflicting prices may break trust, but personalization run

13%

27%

35%

44%

49%

29%

32%

28%

38%

26%

49%

37%

25%

37%

38%

38%

39%

40%

46%

49%

54%

55%

60%

62%

Customer sentiment gathered from social media

Regional or store demographics

Planned inventory levels

Clean demand at an aggregate level

Current inventory levels

Customer demographics

Customer segmentation

Market basket data

Customer purchase history

Clean promotions history (mechanisms,placement, media, dates, etc.)

Competitors prices

Clean demand at a store level

Pricing Data Elements: Value vs. Use

Very valuable Major role


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amok, or even out of context or outside the bounds of what a customer expects from you will

destroy trust.3

Additional details by revenue:

Mid-size retailers show the most interest in market basket data - 75% vs. mid-40%'s for

peers. (Note, in our 2012 merchandising benchmark, no mid-sized retailers reportedactually using market basket analysis at all)

The smallest retailers show the most interest in customer demographics - 57% vs. 33%

of the largest retailers. This is unusual because the largest retailers usually track with the

smallest when it comes to anything that helps build a sense of customer intimacy.

Mid-size to large retailers ($250-999M and $1-5B) have the most interest in customer

segmentation. For mid-size retailers it may very well be the case that the customer base

has grown to the point where it's worth segmenting as a management and targeting tool.

The smallest retailers are most interested in competitors prices - 71% vs. low 50%'s for

peers. This is interesting because the smallest retailers weren't the ones most interested

in building a competitive price image - they cede that territory to the largest retailers (31%

of $5B)

Customer Data - A Laggards' Tale

Laggards jumped on the customer data element as part of pricing whole-hog this year, placing

disproportionately more value emphasis on nearly every customer data element we asked about

(Figure 16).

Figure 16: Jumping On The Customer Bandwagon


Laggards drive most of the interest across the board around customer data . Historically it

has been Winners who have expressed the most interest in using customer data elements as part

of their pricing capability. That has changed. Laggards consistently rated customer purchase

3The most recent example involves Target and a pregnant teen:

http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/

41%

56%

59%

63%

65%

81%

22%

23%

27%

33%

46%

48%

16%

38%

39%

48%

56%

65%

Customer sentiment gathered from socialmedia

Regional or store demographics

Customer demographics

Customer segmentation

Customer purchase history

Clean demand at a store level

Customer Data Elements in Pricing - "Very Valuable"

http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/


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history, demographics, segmentation, even social media sentiment as highly valuable, in some

cases doubling down over Winners. The biggest difference came from customer social media

sentiment, where laggards outstrip Winners' interest in this data element by more than 2 to 1.

Winners appear to be more cautious in embracing some of these data elements.

It seems that cus tomer data has become the new magic bullet for laggards. The only catch -

as we'll see below - is that Winners are actually using this data to make pricing decisions.Laggards are not. This becomes clear when we look at the deltas between "very valuable" and

"plays a major role" (Figure 17).

Figure 17: Al ignment: Using What You Value Most


Winning retailers do a much better job of matching data elements' expected value to their

current use - their biggest gap in customer data elements is a 23% difference between the

number of Winners who value clean demand at a store level and the number who say it currently

plays a major role in their pricing strategy. For laggards, no data element has less than a 29%

gap - a clear difference between intentions and execution.

Making It All Happen

When it comes to actually translating intentions into execution, customer and product data

warehouses top the list in terms of adoption (Figure 18). These are important foundational

elements - the repositories of all of the data elements that retailers say they value and

occasionally use, noted above.

0%-1%

-4%

-17%

-10%

-23%

-29%

-38%

-29% -29%

-35%

-50%

Customersentiment

gathered fromsocial media

Regional orstore

demographicsCustomer

demographicsCustomer

segmentationCustomer

purchase historyClean demandat a store level

Gaps Between Value & Use of Data Elements(a negative number indicates higher value than use)

Winners Laggards


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Figure 18: Foundations Laid


In the near-term, retailers plan to make the most progress against customer data warehouse,

regular price planning, forecasting, and management, and promotions planning, forecasting, and

management. However, key differences emerge by performance.

Technology's Performance GapWinners outstrip their peers in current deployments almost across the board. They outpace

laggards the most around customer data warehouse, regular price optimization, inventory

management (availability as an input to price), and end-to-end price lifecycle management

(Figure 19, below).

Laggards have at least achieved parity with Winning retailers when it comes to promotions

planning, forecasting, and management, markdown planning, forecasting, and management,

promotion optimization, and markdown optimization. However, for promotions in particular, we

question how well laggards can make use of these tools considering how far behind their peers

they are in both implementing a customer data repository and making use of customer driven

data elements as part of their pricing capabilities.

10%

10%

12%

13%

16%

18%

19%

23%

26%

29%

30%

33%

22%

16%

15%

12%

18%

12%

15%

13%

21%

22%

15%

19%

21%

15%

23%

18%

24%

19%

23%

20%

17%

13%

15%

12%

16%

13%

16%

24%

18%

15%

12%

20%

17%

15%

12%

11%

31%

46%

35%

34%

25%

36%

32%

24%

19%

21%

27%

26%

Markdown optimization

End-to-end price lifecycle management

Promotion optimization

Price intelligence

Markdown planning, forecasting and management

Rules-based pricing engine

Inventory management - availability as a price driver

Regular price optimization

Promotions planning, forecasting, and management

Regular price planning, forecasting, and management

Product movement data warehouse

Customer data warehouse

2013 Pricing Technology Adoption

Fully Deployed Piloting/ In Rollout Evaluating/ Selecting Exploring/ Budgeting No Plans


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Figure 19: Fol lowing Winners' Lead


When it comes to adoption plans, the near term picture looks set to shift in the next 12-18

months. Winners have the most aggressive plans when it comes to markdowns - both planning

and optimization - and promotion optimization. Laggards, on the other hand, are focused on - no

surprise - customer data warehouse, alongside several capabilities that will improve the product

side of their pricing capabilities (Figure 20).

Figure 20: Adoption Catch-Up


7%

13%

13%

0%

6%

25%

6%

6%

13%

19%

25%

25%

7%

11%

11%

15%

16%

22%

22%

26%

27%

32%36%

42%





Price intelligence

Promotions planning, forecasting, and management

Inventory management - availability as a price driver



Regular price planning, forecasting, and management



Solutions "Fully Deployed"

Winners Laggards

25%

50%

25%

25%19%

31%

31%

31%

13%

25%

20%

31%

4%

8%

8%

8%

11%

12%

15%

15%

19%

22%

30%

33%




Price intelligence

Regular price planning, forecasting, and



Inventory management - availability as a price

Promotions planning, forecasting, and




Solutions "Evaluating/Selecting"

Winners Laggards


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A Note About Hosted Solutions

One of the peculiarities of pricing has been its early focus on hosted solutions. Call it what you

will, all of the terms apply: Software-as-a-Service, On Demand, Hosted, Cloud-Based. In terms of

overall industry interest in such solutions, pricing has long been a leading indicator. How did it

fare in this year's survey?

Currently, 38% of respondents are neutral about it, and only slightly more are positive than

negative. Winners are the most opinionated, splitting roughly 1/3-1/3-1/3 between positive,

neutral, and negative. Average performers are most positive. Given all of the recent attention and

buzz that cloud-based solutions have generated, and pricing solutions' early entry into this kind of

solution architecture, it's clear that hosted solutions do not necessarily provide perceived benefits

to retailers one way or another. Unfortunately, this may have more to do with the conservative

nature of retail IT departments than anything related to the solution architecture itself.


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BOOTstrap Recommendations

Resisting Discounting's Siren Call

Pricing is both one of the most strategic and also tactical retail demand levers. The right price

strategy is a critical part of a retailer's brand promise to customers. The appropriately targeted

and focused price change can save sagging sales or move distressed inventory. It can, as

retailers rightly identify in this research, drive sales or improve margin - or both.

But pricing, just like every other aspect of retail, is being fundamentally transformed by omni-

channel retailing. It is lives at the intersection of customer and product. We've already seen

customer behavior change radically thanks to digital channels and ubiquitous smartphones. And

in 2012, there was near panic in the streets over how consumers were using those smartphones

to cut retailers' carefully constructed pricing strategies to shreds.

While overall the same process that has driven pricing in the past drives pricing today, the details

have changed significantly. Retailers still set corporate objectives, plan their price strategy,

execute it, and measure results (theoretically - as we saw above, these ideals do not always

translate into practice). But it doesn't help that all of this change - showrooming, price

transparency, more targeted promotions across more digital channels - occurred in an economic

downturn. This has led to consumer price sensitivity that retailers cannot seem to leave behind.

At a time when retailers should be transforming their pricing strategies and practices for the omni-

channel age, they are caught in a downward spiral of deeper and deeper discounts.

We're never going to persuade retailers to abandon the siren call of cutting prices to stimulate

sales - we're not even going to try. What we hope retailers will consider, instead, are some key

ways they can turn pricing into a strategic advantage, whether a luxury retailer or a deep

discounter, whether caught in the throes of showrooming or safe and sound in a brand that just

can't be copied.

What needs to happen to make pricing a fully contributing strategic solution for retailers? The

theme is MEASURE:

Measure the Impact of Price Changes

Yes, this requires data - clean data - and it requires discipline. But having a specific problem to

solve often creates focus that helps an entire company understand what's important, and

identifies critical gaps that need to be filled. Bad data is better than no data, if it gets you closer to

good data in the end. And there is so much more data available out there than there used to be.

Records of promotion histories and campaigns, detailed digital measurements of responses,

complete transparency into competitors' prices and availability.

The virtuous pricing cycle of plan - execute measure falls apart if you ignore any point in the

circle. And retailers have been ignoring Measure. If you can't measure, how can you plan to

correct for the last cycle's mistakes? How do you know if you executed the way you needed?

Measurement should be a priority, even if it isn't clean or easy - sometimes the journey is just as

valuable as the destination.


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Corollary: Measure the Customer Impact of Conflicting Channel Prices

This year a surprising number of respondents reported that they believed they had overcome

their zone pricing challenges. But given the lack of measurement that occurs around the impact -

current or future - of pricing decisions, forgive us if we're skeptical.

Retailers need to make 100% sure that their zone or channel pricing strategies are not damaging

their credibility with consumers. This isn't about watching sales, or listening for anecdotal tales

about angry customers from store staff. This is about measuring reliably how often mobile price

comparisons are happening in your stores (a question practically designed for video analytics),

testing specific response policies, and following up to explicitly understand how customers

perceive your response to them.

Our take, from listening to retailers and listening to shoppers, is that retailers don't fully

understand how much they damage their customers' trust when pricing conflicts are not

handled smoothly. Or even how often a customer walks away, or abandons her cart without

telling the retailer anything about why.

Retailers seem to believe that having a policy is all they need to reassure customers about

different prices across zones or channels. But we've already seen that especially when it comes

to change, consumers need a LOT of communication. Be specific. Be repetitive. Make them sick

of your message - then you'll know that it's been received.

Faster and More is Not Better - Measure the Cost to Stores

Stores are already set back on their heels by the impact of digital channels. Many retailers are

struggling to define the strategic role of stores, let alone how prices in stores should be handled.

Digital channels, because of the ease with which price changes can be made, move at a much

different speed than stores.

But while changing a price on the website is virtually free, changing a price across hundreds of

stores can cost an enormous amount - not just in labor and signage, but in selling opportunitycosts. Trying to prod stores into moving as fast as online by inundating them with price changes

is an exercise in store confusion and customer disillusionment (refer back to the corollary above).

As you build your measurement strategy, include a look at the impact of price changes on stores.

Are they able to effectively implement all the price changes you intend? What's their capacity

before things fall apart? How much does a store price change cost? Really cost - in labor, in

supplies, and most importantly in the opportunity cost of a sales associate who isn't selling. Does

that sales lift pay off when stores have to bear the brunt of execution?

So we can see that the corollary to the virtuous pricing cycle (plan-execute-measure) also applies

to those perceived as most recalcitrant to pricing practices, the in-store workforce. Plan the labor

required to execute expected price changes, execute on those changes, and finally measure the

effectiveness of that execution. As we said earlier in this benchmark, its not enough to measurewhether or not were making good time. We also need to know that were headed in the right

direction.


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Appendix A: RSRs Research Methodology

The BOOT methodology is designed to reveal and prioritize the following:

Business Challenges Retailers of all shapes and sizes face significant external

challenges. These issues provide a business context for the subject being discussedand drive decision-making across the enterprise.

Opportunities Every challenge brings with it a set of opportunities, or ways tochange and overcome that challenge. The ways retailers turn businesschallenges into opportuni ties often define the difference between Winners and also-rans. Within the BOOT, we can also identify opportunities missed anddescribe leading edge models we believe drive success.

Organizational Inhibitors Even as enterprises find opportunities to overcome theirexternal challenges, they may find internal organizational inhibitors that keep themfrom executing on their vision. Opportunities can be found to overcome theseinhibitors as well. Winning Retailers understand their organizational inhibitors andfind creative, effective ways to overcome them.

Technology Enablers If a company can overcome its organizational inhibitors it

can use technology as an enabler to take advantage of the opportunities it identifies.Retail Winners are most adept at judiciously and effectively using these enablers,

often far earlier than their peers.

A g raphical depic ti on of the BOOT fo llows:


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Appendix B: About Our Sponsors

360pi, a global leader in retail price intelligence, delivers online competitive monitoring solutions

that give retailers complete visibility into their competitors' prices. Top retailers use 360pis

industry-leading match and accuracy rates made possible by its proprietary artificial intelligence

and cloud-based, big data capabilities to enhance their pricing strategies and enable margin

and revenue increases of up to 80%. For more information, please visit:www.360pi.com

Revionics delivers the industrys most powerful End-to-End Merchandise Optimization solution,

enabling retailers of all sizes to execute a fact-based omni-channel merchandising strategy

utilizing the most comprehensive set of shopper demand signals to enhance financial

performance with improved customer satisfaction. Revionics solutions leverage advanced

predictive analytics and demand-based science to ensure retailers have the right product, price,

promotion, placement and space allocation for optimal results across all touch points in the omni-

channel shopping episode online, in-store, social and mobile. Revionics has been recognized

as a 2012 Deloitte Technology Fast 500 company and has more retail locations under

optimization management than any other vendor. Visit us atwww.revionics.com.

With SASs 35 years of advanced analytics and industry expertise, retailers choose SAS to

improve business results with solutions for merchandise planning, size optimization, localized

assortment optimization, space planning and optimization, price optimization, cross-channel

campaign management, customer insight, social media analytics, and advanced forecastingacross the enterprise. Retailers turn to SAS because SAS drives better results.

Used at more than 55,000 sites in 131 countries, including 90 of the top 100 companies on the

2011 Fortune Global 500

list, SAS is proud to give our customers THE POWER TO KNOWFor

further information, visithttp://www.sas.com/retail/.
http://www.360pi.com/http://www.360pi.com/http://www.360pi.com/http://www.revionics.com/http://www.revionics.com/http://www.revionics.com/http://www.sas.com/retail/http://www.sas.com/retail/http://www.sas.com/retail/http://www.revionics.com/http://www.360pi.com/


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Appendix C: About RSR Research

Retail Systems Research (RSR) is the only research company run by retailers for the retail

industry. RSR provides insight into business and technology challenges facing the extended retail

industry, providing thought leadership and advice on navigating these challenges for specific

companies and the industry at large. We do this by:

Identifying information that helps retailers and their trading partners to build more

efficient and profitable businesses;

Identifying industry issues that solutions providers must address to be relevant in the

extended retail industry;

Providing insight and analysis about a broad spectrum of issues and trends in the

Extended Retail Industry.

Copyright2013 by Retail Systems Research LLC All rights reserved.No part of the contents of this document may be reproduced or transmitted in any form or by any means without the

permission of the publisher. [email protected] more information.for more information.
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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