How can a retail business provide better value for its customers while increasing profits? With the right price optimisation strategy, says City Farmers’ Clayton Hollingsworth.
Re-examining product prices can be managed in such a way to drive value for customers and increase profits, according to City Farmers‘ Managing Director, Clayton Hollingsworth. It’s also a great way to scare customers away for good if incorrectly implemented.
Presenting at this week’s Retail World Conference and Exhibition, Hollingsworth spoke on the topic of Data-driven pricing and promotions through optimisation science. Through the combination of accurate reporting, data analysis and best practices pricing strategies, City Farmers has been able to implement sweeping changes both in-store and online.
His business specialises in pet and pool supplies for consumers, and began retailing its goods via warehouse-style stores in Perth, growing its footprint throughout the 90s. However, the company is not averse to embracing new technologies and now considers itself to be truly omnichannel. Which turned out to be quite a boon once the team had its “three lightbulb moments” regarding its pricing.
City Farmers’ warehouse-style retail outlet.
Three Lightbulb Moments
“We were reviewing our pricing strategy in mid-2012 when we had three lightbulb moments,” Hollingsworth states. “We first realised that prices decisions and outcomes must be manageable, but they also have to be based on strategy and all of it must be measurable. Previously, we weren’t able to say this was true of our pricing structures.”
Hollingsworth found that pricing decisions were instead being made based on a series of assumptions, traditions or pure gut instinct and realised City Farmers’ methodology in this area had to change. It was for this reason his company contracted Revionics to analyse their data and assist in reforming this element of their business.
Having already made the shift to online, City Farmers isn’t inexperienced with solutions providers, so the partnership formed quickly.
“We began looking for a solution in June 2012 and had signed with Revionics within a month,” Hollingsworth says. “By the end of the year we had begun implementing changes based on the feedback of their analysis.”
As a system, Revionics works on a software-as-a-service (SaaS) model, whereby an interface is provided to the client (City Farmers), which allows them to analyse data at the item or store level and makes pricing and promotion recommendations. Forecast modelling is computed in real-time, so that the result of a single price change can be predicted with a high degree of certainty.
City Farmers was confident that the system could work for them because it had worked for others already. Karen Dutch, Senior VP of Marketing at Revionics highlights the work the company has already done.
“The Revionics system is already producing results for businesses globally,” she says. “In the US, for example, we’ve worked with brands like Family Dollar and eBags to provide scientific insight and recommendations into their promotions and everyday prices. We currently analyse over 15 billion SKUs every week to make our pricing recommendations. Demand models are also rebuilt weekly so that they are fresh and reflect emerging signals, allowing companies like City Farmers to run real-time, ad-hoc ‘what if’ simulations in order to compare and contrast strategy change outcomes before implementing them.”
Price elasticity demonstrates the relationship between price and demand.
The Science Behind Price
Hollingsworth explains that the three key elements to producing optimal prices are science, business rules and configurable strategies. When it comes to rules and strategy, these are generally created by the business itself, based on the findings of the ‘science’ part of the equation.
Usually a business would consider employing a number of analysts to examine historical pricing data and apply scientific processes in order to yield actionable outcomes. In City Farmers’ case, this process was completed with a straightforward transfer of data.
“Through the analysis of our data,” he says, “we now had complete transparency over crucial factors like price elasticity and KVIs.”
Known value items, or KVIs, are products that have a disproportionate impact on consumer price perception. They’re crucial to retailers with a large number of SKUs because they have the ability to drive traffic in-store or online, they also take an ‘anchoring’ position in the shopping basket. However, KVIs are also very sensitive to price changes, as well as local competitive influences.
“Before we began this process we had over 400 KVIs – or what we thought were KVIs,” Hollingsworth says. “We’ve since come to see that in reality, only 89 products are true KVIs and this has significantly changed the way we price a lot of our stock.”
As City Farmers began to implement the changes suggested by Revionics’ data analysis, an interesting thing occurred, Hollingsworth says.
“Prices weren’t necessarily changing across the board on a regular basis, but we did see regular price updates occurring in both directions. For our customers, this has been seen as a good thing as many of their most popular products have become even better value.”
Rather than increasing profit by simply pushing up the price unilaterally, City Farmers was able to clear more volume by reducing prices in many cases, resulting in higher profits regardless.
Since implementing its new data analysis platform, City Farmers has grown gross profit by several percentage points – but it doesn’t end there.
“This is just the start of our program when it comes to optimisation science,” Hollingsworth explains. “Next we need to consider how the technology can help us improve our promotions, including EDMs, print catalogues and segmented offers. Then we’ll also look at optimising how we replenish stock in a very similar manner.”