In order to identify your key value item, first and foremost, you need to understand what it is.
Your first assumption may be that it’s your highest priced item. That definitely makes figuring it out fairly simple, but it only holds true for those items at the furthest points on the continuum, since after all, price perception typically comes from the higher priced items instead of the lowest ones. However, if you go with this approach, then you’ll have low margins on your high priced items and vice versa on the lower ones. As a result, you don’t fully take advantage of the value of KVIs.
What’s worse, is to think that any item that has a high margin rate negatively impacts price perception. Keep in mind that the effect perception has is not equal to price.
One way that you could potentially look at key value items is by basing your price on how your customers think that it should be priced. Here, you’re measuring both the perception and price, which are the two parts to KVI pricing. However, although this is easily evaluated through surveys, people tend to suggest very low prices.
As you can see, a key value item is one that is a lot more difficult to pinpoint in your inventory than you’d initially think. However, a good way to find it is by looking for items that push both the price and value perception for customers.
To get a better understanding of what it looks like, let’s go through an example.
The key value items in a grocery store are milk, eggs, and bread because every shopper knows around how much they’re supposed to cost. Therefore, if they find a grocery store that sells them for cheaper than usual, then they automatically make the assumption that the rest of the items in stock have lower prices, too.
Based on this example, a KVI should be commoditized, this way, customers can compare it across various stores. In other words, it should have a typical price that most consumers have learned to assume it should have. However, it should be elastic. Fluctuations in prices impact the volume of the item, thus pushing the store’s perception.
Retail, today, is much different than it used to be. In this new digital retail era, people now shop differently which has caused the way we price things to change dramatically. Dynamic pricing is one of many examples. With the help of dynamic pricing engines, prices are now constantly altered because of alterations in rival company prices.
With this new direction, some retailers may feel as if all of their products are KVIs, thus pricing everything low to remain competitive as well as in consumers good books. However, on the contrary, retailers should take advantage of everything the digital era has to offer.
For one, there's so much more information available to you out there than just the traditional, for example, transaction and basket data. Today, you can find numerous user reviews and read tweets and comments from various social media platforms.
Additionally, don’t segment your inventory into items that are KVI and those that aren’t. This is no longer useful with online stores. On the contrary, to harmonize customer demand, the actions of your rivals, as well as the economic welfare, retailers should be flexible, yet have control over price segments. That’s made possible by making items tough enough to be on their own, but not to the point where they’re uncontrollable.
With those kinds of changes, your static KVI list could become a much larger dynamic one that could fall into a number of segments, thus even giving you control over other items in other channels.
KVI-analysis helps retailers figure out which items won’t proportionally push consumer’s price-value perception. It helps guide their item-price decisions in opposition to reference-competitor price indexes. This analysis is based on behavioral data like sales and household penetration and the regularity of purchases as well as on data from the customer awareness from certain items, the first price that comes to their mind and how much it impacts their view of each store. Those price decisions could be used to copy, or price a bit higher or even lower. This just depends on the rival and customer dynamics of the location as well as on the category goal and item segment.
As you can see, KVIs play an important role in the pricing strategy. However, if you want to push traffic and profit in the digital era, you need to use the right approach and be able to find your true KVIs. If you don’t adapt to today’s dynamic, you put your company at a bigger risk of loss of customers and margins.