PRICING BY THE RULES 2004-08-16 (2)

Julie Gallagher

While many retailers insist their go-to-market strategy is based on factors beyond just price, in this age of Wal-Mart, they must often resort to price changes.

Given thousands of potential price changes, retailers have had to develop home-grown systems that allow them to automate what would otherwise be a tedious manual process.

Now retailers, especially mid-tier operators with less than $1 billion in annual volume, are realizing their home-grown price management systems may not be enough. As a result, they are placing priority on more responsive systems that can manage and execute pricing changes based on predetermined rules.

Two such retailers are Balducci's, Bethesda, Md., and Super S Foods, San Antonio, which are in the process of implementing rules-based pricing systems that are expected to go live next month.

"Many retailers have struggled with constraints put on them by home-grown price management systems," said Scott Langdoc, vice president of research for the retail industry at AMR Research, Boston. He is currently writing a study on price management and optimization systems that will be released in September. "These systems are quickly being replaced by more flexible, scalable solutions that have the ability to grow with retailers."

The new systems allow retailers to react to competitive changes and new costs much faster, added Langdoc. "Older systems are often constrained by the number of pricing zones available or the speed in which price changes can be effected."

The interest in pricing systems was reflected in SN's 10th Annual State of the Industry Report, released in February. Among retailers surveyed, 41% said price management initiatives will command high priority in 2004, tied with preparations for 13-digit bar codes and second only to inventory management initiatives. Additionally, 39% of respondents reported that price management initiatives were a high priority last year, second only to point-of-sale systems.

Some retailers are not stopping with price management systems. They're adding even more sophisticated, and expensive, price optimization systems to their arsenal. While price management systems may run in the hundreds of thousands of dollars, optimization systems can cost in the millions, noted Tom Rauh, managing director, Soft Solutions, San Francisco.

While price management systems automate price changes based on rules governing margins and variance from competition, optimization takes that further by forecasting the impact of such changes on volume and profits. Traditional systems monitor the effect of changes after the fact.

Update at Balducci's

Balducci's, Bethesda, Md., is an example of a small, 11-store retailer that decided to trade in its antiquated home-grown price management capabilities for those offered by Salt Lake City-based Tomax's Retail.net, in May.

The price management replacement is part of an overhaul of the company's outdated core systems. It comes on the heels of the acquisition of parent company Sutton Place Group, Bethesda, Md., by New York-based Bear Sterns' merchant banking unit, in December. "Balducci's had been using home-grown applications that required manual review of sales files and movement data for the past decade," explained Carey Lowrey, chief information officer, Balducci's.

"Once the system goes live, we'll go from managing price the way it was done in the '60s and '70s to leveraging a leading-edge, rules-based price management system." Balducci's plans to go live with the system's price management capabilities on Sept. 7.

In addition to pricing, Retail.net will handle a spectrum of tasks. "From vendor acquisition to the sales process, Retail.net will allow me to create one seamless view of all of the activities up and down the organization," said Lowrey.

San Antonio-based Super S Foods, which operates 47 stores, has also focused much of its attention in the past year on a rules-based price management initiative that will expedite its pricing process.

Dennis Hudson, vice president of retail services at Super S, is confident the system will help the retailer achieve a 5% to 6% increase in sales, adding another percent to gross profit. It is set to go live Sept. 1.

"The rules-based system will take so much of the data entry and manual pricing out of headquarters," he said. "We will have a better price management strategy and controls that will allow us to free up our buying and merchandising groups. We'll also have analytic tools at our fingertips to help us generate sales through different promotions." Super S will leverage Irvine, Calif.-based TCI's HQ pricing solution in conjunction with the vendor's Category Analyzer.

HQ is a centralized pricing and inventory management solution that executes rules-based price changes throughout the organization. These changes will be based on information obtained from Category Analyzer, which provides item movement reporting and analysis. For the last six months, Super S has been running the Windows-based Category Analyzer. At first, it ran the analytic tool with its existing DOS-based movement management legacy system for data verification purposes. Category Analyzer has since replaced that system.

The retailer is in the process of upgrading from TCI's IMS software to HQ. IMS is an earlier version of HQ that allows for store hosting, but does not have the ability to perform the rules-based pricing and automatic price generation that HQ has.

Once Category Analyzer begins working in conjunction with HQ, it will execute "margin and sales comparisons, calculate sales and margins based on price type, and compare target margins to the actual margin achieved by the store and company," said Hudson.

Rules of the Game

Information gained from Category Analyzer will help Super S generate a set of rules by which to govern its price management system. Indeed, experts noted a pricing system can only be as powerful as the rules that govern it.

"Establishing a good set of rules is the most important thing," stressed Langdoc. "Retailers recognize that they need to enforce pricing integrity against a set of key rules, like how close in pricing they want to be to the competition, how much prices can go up or down, and how to handle promotional pricing. New systems provide a long list of parameters that help manage and control pricing policies."

Initially, most rules affecting prices at Super S will be drawn from item movement information provided by Category Analyzer. The retailer will also use data from ACNielsen, New York. During the remainder of the rules establishment process, Hudson acknowledged that he and his team will learn as they go. The retailer plans on taking some cues from more seasoned users of the TCI pricing system.

"We will visit non-competitive retailers who are using HQ so that we can learn about how they went about generating pricing rules and fine-tuning them," said Hudson. "Eventually, we will have category rules and strategies for three base price zones." The upgraded functionality will enable Super S to consolidate its pricing zones from five to three.

At Balducci's, the Tomax system's analytic capabilities will deliver information on which the chain can base its pricing rules. "Retail.net allows me to build data query applications and access information points to analyze customer data," said Lowrey, who looks forward to instant information access, rapid deployment, and flexible returns with the new system.

Although retailers like Super S have experienced a relatively painless implementation, Langdoc warned that the deployment of price management systems can be complicated. "The fact that price management systems resonate at the core of retailers' world is what makes them inherently complex," he said. "Pricing systems are also complex because they tie into promotional planning systems and a number of additional people and processes."

These systems have to recognize details since one item can have four to seven prices, added Bill Keyworth, senior vice president of marketing at TCI.

To help simplify the process, Langdoc encouraged retailers shopping for a new price management solution to pay special attention to the usability of the technology they evaluate.

"The better the user interface, the more supportive the tool will be of the price management process," he said. "Fortunately, vendors are paying close attention to the fact that in order for these systems to be useful, they need to hide all of the science behind workflow and recommendation tools."

Caveats on Price Optimization

Price optimization tools have attracted much attention, thanks to large industry implementations like those taking place at Albertsons, Boise, Idaho. However, immature price optimization offerings may be stalling wider adoption of the technology.

This was the finding of Cambridge, Mass.-based Forrester's study "Price Optimization Adoption Soars in 2004." The study reveals that companies are finding it hard to justify investment in price optimization tools that often lack analytical transparency, present unfriendly user interfaces, and require customization. Yet, noted observers, companies that have taken the plunge and implemented price optimization solutions have a lot to show for themselves.

"Although these retailers keep very silent publicly, they've achieved very dramatic results," said Scott Langdoc, vice president of research on the retail industry, AMR Research. "AMR has seen margin improvements as high as 9% to 16% in certain categories."

In order to gain similar results, Forrester advises companies shopping for price optimization tools to research their specific requirements, and understand the people and process changes needed to take full advantage of their investment. Then they should customize the tool to ensure a complete fit with their business processes.