Retailers who've driven profit margins with the assistance of price optimization technology — used to identify optimal prices — are drilling down even deeper to uncover opportunities to maximize promotions.
Promotional price optimization technology, like everyday price optimization software, is integrated with a retailer's point-of-sale application to capture movement data. The analytic tool reviews that data, as well as information relating to cost of goods, price elasticity and competitors' prices to determine the optimal products to promote, and the best price based on the retailer's marketing needs for that store, that category and/or that item.
“More and more retailers are signing up to pilot promotional price optimization tools,” said Jon Hauptman, vice president of Barrington, Ill.-based Willard Bishop. “It's really started to get traction in the last couple of years and I expect it to get more traction in the months to come. It's an opportunity to drive bottom-line improvement while maintaining your price image.”
Supervalu, H.E. Butt Grocery, Albertsons, Safeway, Kroger, Big Y Foods, Giant Eagle, Brookshire Bros., Penn Traffic, Ukrop's and Food Lion are among the retailers leveraging promotional price optimization software.
Results from implementing DemandTec Price, price optimization software, in selected categories at Penn Traffic were “very positive,” noted the retailer's co-chief operating officer, Greg Young, in a statement. “Based on these results, we plan a full-scale rollout of DemandTec Price across additional store product categories.” Penn Traffic is now implementing DemandTec's Promotion and TradePoint modules.
“With the addition of DemandTec Promotion and DemandTec TradePoint we expect to develop new, successful, and highly strategic promotional strategies that will satisfy our customers and enhance our competitive position,” Young said.
Analytic tools like these are leading to more retailer-driven promotions.
“Promotions used to be determined by the trade funds offered by manufacturers,” said Mike Griswold, research director for Boston-based AMR Research. “Now, retailers, using promotional optimization tools, are putting more science around the process, using data relating to how promotions performed in the past, and tailoring promotions more to their specific customers. Trade funds are still important, but they shouldn't be driving the bulk of a retailer's advertising. The customer should be the driver.”
Promotional price optimization tools integrated with promotional management software can help retailers plan promotional events in advance of 12 months or longer. They do that by analyzing data that impacted past promotions, such as how well a promotional item, or one similar to it, sold when it was last promoted; how that item was displayed when it was last on promotion; and whether there was a temporary price markdown during the past promotion.
One large national grocery chain, said Dan Fishback, president and chief executive officer of DemandTec, San Carlos, Calif., has captured enough casual promotional data that the chain is able to evaluate and then manipulate a wide variety of promotional variables, including the impact on demand when an ad is placed on the front page, the inside or back cover of a circular and the impact based on where promotional items are displayed in a store.
It can tell whether discounting a popular brand item like Tide will drive less margin into a category, but, at the same time, help create more profitable incremental sales as customers, who came for the Tide, shop the store making impulse purchases.
“That's significant,” Fishback said, “because for the first time, retailers can take a more consumer-centric approach, linking their understanding of demographics and customer segments with an analysis of their market basket and shopping behavior in order to better tailor individual promotions.”
KSS Inc.'s vice president of marketing, Lyle Walker, noted that the more history retailers have as they work on optimizing promotional prices, the more they can forecast what an item will do when it is priced at 99 cents and placed on the front of an ad vs. the back or inside.
“It's difficult to collect all that data, but the more causal information a retailer has, the more effective their promotions are, he said.
Retailers just starting with promotion optimization technology will still recognize its benefits, but the tool's value will grow as they collect more data to plug into their forecasting software.
Waldorf, Germany-based SAP AG has nine retailers, including three supermarkets, using its SAP Demand Intelligence suite, which includes base, promotion and markdown pricing optimization software that analyzes the effectiveness of past promotions, automates the process of merchandise and assortment planning, and integrates promotion layout and circular creation with forecasting and optimization.
After applying SAP's Demand Intelligence software to what had seemed to be a particularly effective promotion, a large grocery chain learned that the promotion had actually hurt the category and the sales and margins of accessory items, according to Richard Murray, vice president of solution strategy for SAP Americas.
As part of the promotion, five packages of cereal sold for $10.
“It pushed people to buy in large quantities and the margin was not eroded because it was a great deal price,” Murray said. “But after analyzing the promotion, the retailer realized that everyone bought so much cereal they overloaded their pantries. Subsequently, sales for the category were soft as were sales for affinity items. So while that promotion was good in the short term, in the long term it was not so good.”
Todd Michaud, president and CEO of Sacramento, Calif.-based Revionics, which provides promotional, base price and temporary price reduction, optimization solutions to dozens of small and mid-sized grocery chains and independents, estimates that retailers using promotional and base price optimization tools, can enhance net margins by as much as 1% to 2% and sales by 3% to 5% by identifying items that retailers can sell at increased margins while maintaining or enhancing customer loyalty.
Last month, Mill Valley, Calif.-based Mollie Stone's Markets, which operates eight stores in the San Francisco area, and Salem, Ore.-based Roth's Markets, which operates 11 stores, became the latest supermarket retailers to sign up with Revionics.
Mike Stone, co-owner of Mollie Stone's, said he expects the Revionics' price optimization tools to provide tremendous value. “The price of every item is optimized each week, allowances are more easily managed and the visibility we'll have into our product selection and its movement will greatly improve our category management,” he said.
Roth's Markets President Michael Roth said that partnering with Revionics will enable Roth's “to expand our pricing strategies and respond more quickly to the competition.”
AMR Research projects that an average “promo-centric retailer with 200 stores, averaging $25 million in annual sales each, will see as much as $50,000 of incremental profit per store.” The savings won't come from price optimization tools alone, AMR noted in its report, but from “creating an architecture that combines price management and promotion planning functions, consumer demand analytics, strong execution along with powerful merchant-centric workflows.”
Fishback said that DemandTec, which has 12 large retailers using its promotion optimization software, 10 of them supermarkets, and 25 retailers using its base price optimization software, has found that it is common for retailers using its software to have forecast accuracy in the mid-90% range.
“If you can have that kind of accuracy, you can drive whatever economic levers are important to you as a retailer, whether that is to maintain your price image as you drive some margins up or increase customer sales by investing in driving some margins down,” he said.
Some vendors offer promotional price optimization software as a module separate from base price optimization, but more typically, promotional price optimization is part of a suite of products that can also include merchandising and assortment planning and promotional event management software systems.
The cost to implement price optimization software has been coming down, which is also driving adoption.
“It was initially a seven-figure investment,” Hauptman said. “It's not that anymore because the vendors are offering so many different types of system infrastructures. Some vendors are hosting the application themselves while others install their system with each retailer. That creates different cost structures, but the range now is from about the mid-six figures to multimillions a year.”
Hauptman estimates that over the next four to five years, price optimization will be implemented by all of the major supermarket retailers.
“There is just too much of a disadvantage to not having it, and as price remains such a critical part of the value equation, supermarket retailers have to figure out how to get sharper on price but without giving away the store. Price optimization will help them do that by setting price points that really achieve business objectives and drive the bottom line.”