- The role of KVIs in retail
- KVI management in Grocery retail
- KVI management in Consumer electronics
- KVI management in DIY retail
- KVI management in Apparel retail
KVI positions are an important part of an optimal pricing strategy and help retailers attract price-sensitive buyers and increase margins. In other words, your key value items are the key products in your store that enable you to increase overall sales. How? By attracting users with optimal prices and presenting them with related products from the rest of your catalog. However, depending on the industry, the type of pricing strategy might not be the same. Let's look at KVI pricing strategies in groceries, electronics, DIY, and apparel retail.
By segmenting the assortment, different types of pricing strategies can be applied to different products. The methodology is based on categorizing the assortment into several distinct groups that serve different functions. Let’s focus on the three major categories.
- Key Value Items (KVIs) or Categories (KVCs) – Important products or categories that drive store traffic and influence price perception. These products/categories draw customers into the store, increasing the number of online sessions or daily visitors. Key value indicators are typically competitively priced.
- Volume drivers - Once a customer has entered the store as a result of a competitive KVI offer, it is time to build profitability. The second stage of the customer journey is volume drivers. These items have high unit sales and can be found in various baskets. Their profitability is low, but it is higher than that of KVIs. Volume drivers' goal is to recoup some of the customer acquisition cost from competitively priced KVIs.
- Profit drivers - The products in this category have a high-profit margin but a low sales volume. Customers consider these products to be non-essential, and their contribution to profit exceeds their contribution to revenue.
According to McKinsey, in modern retail KVIs should be reconsidered all the time, while before it was done only once a year or after a major economic or political shock.
Identifying and reconsidering these types of products requires knowledge of your online store's total stock as well as the value of your users' shopping carts. Thanks to this data, you'll be able to know firsthand what the purchase recurrence is for each of them, as well as which other products they're closely related to.
To start with, grocery retailers must identify Product Family and Inter-Product Dependencies, such as different-sized packs or brand vs. private label products.
Consumers typically buy more than one item at a time from a grocery store, so demand relationships within and between products in baskets are critical in determining how retailers set prices.
Understanding demand relationships between items in a shopping basket can be used to implement profit attribution. The loss on one item can be made up for by purchasing another item that will most likely appear in the same basket. A loss-leader item, such as a discounted pumpkin for Halloween, can be used to increase traffic and offset by price increases on complementary items, such as the tealight candles that go inside.
Because KVIs are competitively priced, it is a regular thing to attribute profit proportionally, so that the KVIs receive their fair share of overall basket profitability.
Adopting a high-low price strategy, also known as a loss-leader strategy, enables retailers to take advantage of a larger variety of promotions, discount giveaways, and loyalty programs that improve price perception. But retailers need to pay attention to the impacts it can have on the margin and value perception of the products.
When carried out manually, the success of a loss leader strategy is based more on chance - customers purchasing items they would not have purchased otherwise. Can grocery stores afford to rely on hope in today's data-driven world, where competition forces low-margin pricing in nearly every aisle? Well, seems like they can't.
Grocery stores can increase sales by leveraging competitive intelligence and tools to capitalize on more price-competition opportunities. Lowering prices in response to competitors’ pricing strategies without fully understanding the impact and motivation behind the price change is usually ineffective, especially over time.
Retailer tip: Because promotions are frequently heavily funded by vendors, maximizing promotional outcomes can also maximize vendor funding, resulting in strong, effective vendor relationships
Grocery stores can maximize promotional performance by identifying winners, eliminating underperformers, and identifying opportunities for brands to stand out.
The introduction of electronic shelf labels, as well as a desire to become greener and reduce waste, have fueled a recent trend to increase the pricing frequency on fresh, highly perishable products such as fruit, vegetables, and baked goods based on their intra-day performance. Ultrafresh categories are now top-seller products which in most cases can be defined as KVIs by default.
When using the power of performance-based pricing with a dynamic pricing platform, the fresh aisle is a great place for grocery stores to start showing ROI on their ESL deployment. Intraday dynamic pricing in the fresh aisle will help align inventory with demand, increase yield, and reduce waste significantly.
Grocery stores that use dynamic pricing are demonstrating that the traditional retail experience can be gradually transformed to reflect a more modern buying experience that their customers have every day.
The consumer electronics vertical in retail is one of the most difficult for retailers looking to build a sustainable and growing business due to the specification of demand and competitiveness in the industry. KVI management differs from industry to industry but there is one common thing. It is necessary to deploy an automated pricing solution, especially in a highly competitive vertical, such as consumer electronics.
Product data structure (attributes and classifications) is critical for dynamic price optimization. The more clear and detailed the data, the more effectively the pricing software can operate, and the more diverse the possible business cases.
Retailer tip: Use Google analytics data on visitors and searches and external variables such as market top sellers to support your KVI selection. Try to focus more on searches and forget high-revenue articles.
Another thing is that the ability to calculate price elasticities at the product and category levels is especially important for the consumer electronics industry. Because margins in the consumer electronics industry are frequently very low, many product prices have little room to fluctuate, especially when compared to competitors. Price elasticity enables retailers to capitalize on market opportunities.
Retailer tip: Marketplace prices should be used as a reference but not as a driver to immediate changes, that way you will avoid unhealthy reactive pricing. Instead, use this data to negotiate prices with suppliers.
It is critical to be able to consider complementary goods and substitutes strategically, as well as price them separately when it comes to dynamic price optimization.
Let’s say purchased complementary goods, such as an iPhone and an iPhone cover, can be determined using cross-price elasticities and sold directly as a bundle. The main advantage of this strategy is that bundles can boost both profit and frequency. Pricing software should account for substitutes to avoid cannibalization so that the sale of one item does not automatically lead to a decrease in demand for its substitutes.
To sum up, retailers can maximize the yield from their remaining inventory by combining advanced machine learning models with real-time, reactive price changes. These models also account for cross-elasticity, which reduces the cannibalization effect on the remaining assortment. It is also relevant to have the ability to have real-time data from competitors to be able to support real-time decision-making as well as planning by knowing historical patterns regarding competitors' price positioning.
During the two years of the pandemic increased consumer focus on home improvement and a dramatic shift toward online retail combined to boost DIY sales. High competition, a lack of omnichannel maturity, and rising procurement costs, on the other hand, have put a significant strain on efficiency and margins.
Price elasticity allows retailers to forecast their customers' reactions (demand) to price changes. Taking advantage of price elasticity (of a single SKU or a group) and optimizing price changes accordingly has a direct impact on the retailer's top and bottom lines.
Identifying product families and inter-product dependencies within the assortment, such as different-sized packs or branded vs. private label products, is a critical area that DIY retailers must examine and address.
Because most DIY store customers buy multiple items in a single visit the same as for Groceries, demand relationships between the items in baskets are critical in determining how retailers set prices for KVIs.
Competitor sensitivity is another metric that assists retailers in transitioning from gut-feel responsive pricing to a scientific approach in KVIs selection. Using historical data, the competitive sensitivity coefficient calculates the impact of a competitor's price change on a specific product or category. Once the coefficient value is determined, it can be used to create sophisticated rules for reacting to competitive price changes. This becomes an essential tool for both price perception/customer lifetime value and profit in the DIY space, where different categories may compete with different retailers.
Retailer tip: You can position your KVIs a bit higher, if your service, such as delivery, outstand your competitors. However, make sure your customer is aware of the value you bring outside pricing.
Seasonality and weather trends have a significant impact on DIY retail demand. Seasonal types of pricing strategy helps to minimize cash flow loss during low periods while maximizing profitability during peak seasons. It smooths demand by enticing customers with low prices when demand is low while maximizing revenues with higher prices when demand is high. The right system can ramp down inventory at the end of the season, identify which stores have excess inventory that needs to be marked down, and then optimize those markdowns to maximize margin while clearing inventory before it goes out of season.
The apparel industry is more difficult because of the number of brands.
The first thing you would like to focus attention on during KVIs selection is separating new season items from carryovers. For example, separating new trendy items from plain t-shirts, straight jeans, etc. Since the carryovers tend to migrate from season to season, regardless of trends, you should refill your stock consistently and leave them out of promotions and markdowns. New season KVIs, on the other hand, are trend-sensitive and stock-limited.
That's why your other move is to make sure you have a clear strategy according to product positioning. Separate entry prices, standard, and premium items, and select anchors in each category for better awareness of price positioning. Also, those anchors will help you initiate additional purchases, bringing you more control over the pricing of trend-dependent articles. Using trends to your advantage is an essential skill for apparel retailers. The more your digital marketing strategy influences the trend, the better. It gives you additional control over price positioning and managing stock.
Retailer tip: Your overall goal as an apparel retailer is to minimize discounts and markdowns.
Considering competitors' pricing could be difficult in a multi-brand store. You may need additional attention to the KVI list to do a proper comparison. At the end of the day, your main focus is maximizing sales during the season.
According to McKinsey, the next frontier of fashion and apparel retail is advanced pricing analytics.
What apparel retailers should do is focus on strengthening their digital market positions by identifying the roles of products in a portfolio, finding their real competitors, and implementing smart promo practices.
KVI positions are an obvious component of an optimal product pricing strategy because they are the main products for which the retailer sets a price. KVI are critical positions in a retailer's portfolio because buyers compare prices in different stores.
As a result, KVI becomes an effective tool for managing price perception.
Because we live in the age of big data, retailers can use it to better manage and price KVI and achieve strategic business goals. Flexible data-powered KVI management enables retailers to rapidly react to market changes and cater to customers’ needs before competitors, thus leading to a significant increase in revenues.
Competera is an industry-agnostic solution for online, offline, omnichannel, mono- or multi-brand retailers. We support retailers with analytics to define, manage and revise KVIs & KVCs as well as provide a clear pricing strategy definition. We can help your team get optimal prices for each product across all selling channels by using a unique combination of pricing tools.
Contact us today to learn more about our pricing platform and how we can assist your company in achieving pricing excellence.