To clarify what price optimization software today’s retailers require, we talked with Florian Strecker, an accomplished account executive with 20+ years of experience helping retailers inject Artificial Intelligence into their organizations. Florian explains price optimization's importance for retailers of versatile industries and shares vital components of a successful solution adoption.
After years of your vast experience selling pricing solutions to versatile retailers from all over the world, have you outlined a certain portrait of retailers that need price optimization solutions?
That is a very interesting question. I often hear from retailers that price optimization does not work for them or someone in grocery retail who believes the business does not need price optimization at all. In my opinion, price optimization is relevant for everyone; it's just that not everyone is prepared for it.
Many companies, especially in Europe, are still immature in what we call price optimization. Although they may practice rule-based pricing for some key parts of the assortment, they are far from doing real price optimization across the whole assortment on a portfolio level. Instead, the retailers are focused on a very limited amount of articles and mainly react to the competition. But to stay competitive and also grow profitable, you need to leverage the whole assortment in your pricing strategy.
This is obvious for larger retailers with a broad assortment comprising tens of thousands of SKUs from various product groups. It’s vital for them to have a clear view of the whole pricing portfolio because some assortment areas might be very competitive. Still, there is a huge opportunity to increase profitability by balancing price investments on some key competitive articles with margin gains in other categories of the assortment range.
But price optimization is also essential for discounters with a more limited assortment range and a hypercompetitive pricing strategy. They always keep an eye on the market to find opportunities to lead it, to understand where to follow the competition and where to leverage small price increases, which, multiplied by the number of stores, can still lead to significant margin improvements across the enterprise.
So every retail business needs price optimization. It's just that different industries have different use cases caused by the peculiarities of demand for the product groups that the retailer sells.
Grocery: Price optimization solutions are vital here. Grocery retailers have to constantly adjust to the changing buyer behaviors, rising costs of goods, inflation, suppliers' terms, and all that while growing business metrics. To keep the business afloat amidst the unpredictability, they should turn to intelligent pricing to achieve revenue growth while still keeping customers happy.
DIY: this segment has to do with long-tail and seasonal items that are usually high-margin but require correct positioning and correct price steps. This is where price optimization solutions can help retailers clear stocks at minimized margin loss.
Electronics retail and drug stores are very similar to discounters: they are very competitive and require a good track of price changes on the market.
Fashion retail is very specific and thus brings a scope of challenges to retailers, from setting the first price for new entries and pricing the exclusive range to managing seasonal sellouts while protecting margin. Advanced price optimization solutions can eliminate the guesswork at every stage.
Speaking about retailers' readiness to pricing evolution, at what stage of pricing journey are they today?
Most retailers still plan very manually. Excel is the main tool to prepare pricing decisions, only a selected group of articles is managed in more detail, and the pricing organization is spread across the enterprise. There is rarely a proper use of price elasticity or price optimization algorithms. The pricing management arsenal mainly consists of a more or less sophisticated rules framework which is mainly driven by reacting to the competition. Some already use competitive data collection engines or providers to collect more and more competitive information to understand better how to position themselves against their main competitors.
But with the growing amount of data, it gets increasingly difficult to handle the pricing process within Excel, and the appetite for price management and optimization solutions grows.
Price optimization experiments started already 50 years ago, but retailers have only now begun to realize the importance of pricing done right with the benefits of new AI/Machine Learning concepts.
Some retailers are at the beginning of the journey to price optimization by hiring the right people and building in-house pricing centers. They are only starting to consolidate the pricing competence and define a company-wide pricing process and strategy to eliminate the inefficient decentralized structures where everyone from store management to marketing talks about pricing. At the same time, there's neither pricing organization nor strategy in place.
It is not just a question of using the right tools but growing your pricing organization and competence.
What are the signs prompting that it's high time to introduce a price optimization solution?
From my perspective, the most explicit sign that people recognize and the one that causes retailers to think about their pricing strategy is deteriorating margins and plummeting revenues. We see this happening everywhere where new competition arises. It may be more aggressive players entering the market, new pure online players taking market share, or existing retailers extending their categories. There are still a lot of organizational and transformational challenges to overcome to kick-off a pricing initiative and get it operationalized into a retailer’s business, but those indicators create an urgency for change or vanish from the market.
What goals and challenges do all of the retailers that you speak to have in common?
The #1 goal is to get from a reactive, purely competition-driven pricing to a strategic, forward-looking pricing process. Retailers aspire to an organization that enables a portfolio pricing approach and moves away from single articles to play with the whole assortment range, keeping the optimal competitive position where needed, but leveraging the remaining assortment to drive profitability.
The biggest challenge is the organizational readiness for such a pricing initiative. It requires a different approach to the market, a more centralized way of working, much more automation of the pricing process to focus on the exceptions and give room for forward-looking simulations and a more strategic pricing approach.
Retailers need to stop focusing on individual articles and look at the category and even enterprise-wide goals.
This is not done on day one but requires strong top-level sponsorship, continuous success measurement, and refinement of the process to embed pricing excellence in your organization step by step.
Based on the demand of retailers, what are the key components of a great price optimization solution?
The key is to take the customer from where he is today and take him on a pricing voyage starting with simple things and get more sophisticated over time.
Here is my take on some key steps in this journey:
- Put a pricing organization in place and spend time developing your pricing strategy and KPIs to measure success.
- Define Sponsorship and evangelists who can be pilot users and drive adoption of the solution.
- Refine your competitive position and understanding by leveraging professional competitive data collection solutions. Leverage analytics to understand your key competitors, key competitive items, and the best competitive pricing position.
- Dust off your existing pricing rules framework and define a proper, minimum pricing rule set that doesn’t constrain your pricing strategy.
- Leverage a Price Management solution to embed your pricing rules and strategies into one system, which helps automate the pricing process and get more time to start thinking strategically and outside the purely competitive strategy.
- Define your pricing strategies for categories and start piloting with a selected group of initial categories. It should be the right mix of different categories and strategies to see the impact of portfolio-level pricing.
To support this voyage, here are the features I'd recommend paying attention to when choosing a solution:
- Usability and Transparency are key when gaining the trust of your pricing organization and end-users. It is an absolute must that users can easily understand how a pricing decision is made.
- The solution also has to give a user or a pricing analyst the ability to play around and simulate the impact of changes in price or pricing parameters to make users trust pricing decisions again.
- And finally, it needs flexibility and scalability to grow with the pricing capabilities of the retailer.
In your opinion, what contributes to a smooth solution adoption by retail teams?
Before starting your pricing voyage, make sure you understand your goals and define measurable and clear KPIs. It is critical to continuously measure and communicate your KPIs to get people to trust pricing recommendations. Build a pricing competence team and pick the right people to act as evangelists on the pricing journey. Go step by step, building up trust in the new pricing process. Leverage analytics to drive your pricing strategy and understand competitors, key-value items, pricing rules needed, category strategies, store clustering, and much more. It is a transformational journey that does not end with the first Go-Live. It requires continuous refinement to get to pricing excellence.
Last but not least, to allow a fast project start and early analytical insights, data is the key. So the more focus you put on your data, and the earlier you start preparing the data, the faster you’ll succeed.
Thank you for sharing valuable insights, Florian!
Dear readers, stay tuned for the upcoming episodes of Competera's retail talks.