PRICING INTELLIGENCE 2.0 A Brief Guide to Price Intelligence and Dynamic Pricing by Mihir Kittur.pdf

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Unformatted text preview: Pricing Intelligence 2.0 A Brief Guide to Price Intelligence and Dynamic Pricing By Mihir Kittur Table of Contents Preface Chapter 1: Welcome to the New World of Pricing Chapter 2: The Price Match Trap Chapter 3: An Introduction to Pricing Intelligence Chapter 4: Introduction to Dynamic Pricing Chapter 5: The Human Factor Chapter 6: The Future of Pricing Intelligenc Chapter 7: How to Get Started The Author Mihir Kittur is a Co-founder and Chief Innovation Officer at Ugam. He oversees sales, marketing and innovation and works with leading retailers and brands with insights and analytics solutions around their category decisions to improve overall business performance. The Preface With today’s chaotic buying climate, we’re all very aware of how much retailers are vying for consumers’ limited attention span and the overabundance of choices available to them. The mobile, technology and social revolution have led to the rise of the super shopper who is armed, informed and vocal. Most consumers today begin their shopping journeys online and are looking for the best prices. They’re also acclimatized to dynamically changing prices. Price wars occur in real time now, but some retailers and brands aren’t ready for this new reality. Price Intelligence and Dynamic Pricing are emerging as must-have capabilities that retailers need in order to stay relevant to their consumers and remain competitive and have an edge. Knowing this climate, we’re thankful that you picked this book and arrived at this page. This eBook was developed for Amazon and is an abbreviated version of a much more in-depth book on this topic called PRICING INTELLIGENCE 2.0: The Essential Guide to Price Intelligence and Dynamic Pricing that we encourage you to download here. We hope you find this book a useful read, and welcome your comments and feedback at [email protected] or (415) 320-8426. Thank you, Mihir Kittur Chapter 1: Welcome to the New World of Pricing Overview Your customers are more empowered now than ever before. Armed with smartphones and comparison-shopping engines, even the most loyal ones will go elsewhere if you’re not offering the “right price.” If you are just getting started trying to wrap your head around the new world of pricing, the good news is most of the retail world is still playing catch-up with the next generation of Pricing Intelligence. Are You in the Middle of a Price War? Retailers, as well as the analysts and journalists who cover them, are extremely fond of combat metaphors. Describing an early 2014 discounting frenzy on high-end shampoo brands, The Wall Street Journal declared there was a “Big Hair War” between Procter & Gamble and Unilever over follicles in the United States and Western Europe.1 The Journal also reported that P&G is now in Target’s “cross hairs” for making it cheaper for mega-rival Amazon.com to ship Pampers diapers and Bounty paper towels. Insiders say that the giant retailer has retaliated by devoting less endcap space to P&G brands.2 Is all this battleground talk a bit melodramatic? Perhaps. But the fight for market share is endless and relentless – and it pays to fully understand whom you are fighting for and against in order to build and protect your competitive edge. The world of retail is not for the meek. In the Age of More Choice, you can’t afford to sit on the sidelines while your competitors play the price-changing game. The American obsession with shopping for deals can easily tempt retailers to chase customers at any cost, launching price wars that ultimately might not be in their best long-term interest. As the MIT Sloan Management Review has noted, there are usually no winners in a price war: “The losers are often forced out of business, and the survivors have been known to suffer a long-term squeeze in profitability. Price wars begin when competitors aggressively and repeatedly set prices below established levels.”3 In some cases, companies that initiate price wars engage in self-destructive behavior, which leads to downward pricing spirals that alter industry structures,” wrote Patrick Reinmoeller. “In studying price wars that took place between 1980 and 2013 in industries including airlines, telecoms and financial services, I saw that price wars were invariably linked with serious drops in financial performance. Indeed, when price wars erupted, most companies found themselves in commodity traps: Profits narrowed considerably, and weak competitors had difficulty staying in business.” In a war of attrition, both sides come out badly beaten and worse off than when they started. There’s another way for prices to go, of course. And that’s up. Selectively raising prices, if handled the right way, will not lead to customer insurrection. We promise. Think about your own consumer experience. When you are cruising down the supermarket aisles, you’ll likely find either Coke or Pepsi products on sale for 99 cents for a 2-liter bottle. Stop at a convenience store at midnight and you’ll have no issues forking over $1.50 for a 16-ounce bottle. Want that same bottle at a ballgame or concert? It’s now $4. At the movies, your 32ounce fountain drink is $6 in a souvenir plastic cup. If you’re a devoted soda drinker, you know the price of thirst varies based on where you are, the availability (or lack) of competition, and whether you are willing to wait for either of those factors to change. You won’t stop drinking soda because those are the accepted and universal rules of the game. Even if you’re not in the beverage business, these same pricing principles apply to your customers. Chapter 2: The Price Match Trap Overview Amazon is making millions of price changes each day. Trying to match their every move is a fruitless (and impossible) exercise. You need to play your own game. If you take the price-matching trend to its logical conclusion – every retailer’s prices eventually being the same – you need to give your customers a more compelling reason to keep buying from you and only you. Avoiding the Price Match Trap: Q&A With Kevin Sterneckert In the current hyperactive pricing environment, many top retailers, like Best Buy, have adopted price-matching guarantees as their first line of defense. Customers in brick-and-mortar stores who find cheaper online prices can often get those prices honored by a store manager. Some retailers even offer a price match after the fact – if a customer shows up within a week with proof of a better deal. Wanting to avoid being undercut by even a few pennies, many major retailers continue to expand their price matching policies and proudly announce each new revision in their advertising. Price matching in any form is universally viewed as a victory for consumers, but for retailers, it’s a race to the bottom. To explore why, we talked with retail analyst Kevin Sterneckert, a former vice president of research for Gartner and an industry expert on Pricing Intelligence. According to Sterneckert, retailers who try to compete with Amazon on price “are showing up to a gun fight with a pixie stick.” Q: How far ahead is Amazon in the area of Pricing Intelligence? KS: Let’s put technology aside for a minute. I would say that they are six to nine months ahead in strategic thinking. It’s going to take education and pain for another six to nine months before leading retailers begin to say, “We’ve got to do something different.” Then it’s going to take another six to 12 months to install the technology that’s going to lead to a more competitive set of capabilities. I’m not talking about matching Amazon. I’m talking about going to a gunfight with a gun – and today, people are showing up to a gunfight with a pixie stick. Q: Which retailers are aggressively trying to catch up? KS: The largest companies with the most direct competitive impact are certainly working aggressively. Walmart, Staples, Target, Macy’s and Tesco are among those working aggressively. They recognize the threat, but today they are taking more of a reactionary position than they are taking a strategic proactive position. Most of these companies are still in very early stages. They are thinking rulesbased, they are thinking looking at the competitor, looking at their volume, understanding elasticity and then matching prices on the elastic items. Instead of being a price leader – and that really is what Amazon has done. Q: Which retailers are far behind? KS: The bulk of other retailers are far behind. And it’s not a technology race. It’s a strategic-thinking race. Many retailers get and understand optimizing prices for brick and mortar, yet they have for some reason decided that the right strategy is to match their online price with their in-store price. If that’s your strategy, it is a very flawed strategy. The Solution: How Retailers Can Survive and Thrive The trick, according to Sterneckert, is understanding and influencing the customer through his or her shopping behavior. “The customer cares about certain items [in terms of price sensitivity] and they don’t care about others. You truly can tap into what the customer expects and you can steer the customer in very predictable ways to buy certain items – and to not buy other items,” he says. “Let’s say you have two different sizes of laundry detergent, the 128-ounce and the 96-ounce. If you have more profit on the 128-ounce, you can influence the customer to buy that item just by making the per-unit pricing more favorable. You can also reverse that and make the customer want to buy the 96-ounce item if that’s where all your profit is. This elasticity methodology truly is the way that retailers can win.” Sterneckert used to be in charge of price optimization for H-E-B Grocery Stores, a regional supermarket chain in Texas and Northern Mexico that has achieved greater sales per square foot than Walmart. “It’s because H-E-B has said we’re going to take price off the table,” the analyst reveals. “We’re going to understand our customers. We’re going to study them. We’re going to make sure they don’t go to our competition because of price. We’re not going to say that we’re going to match, but we are going to be right on the items that the customer cares about. And we’re going to offer the customer things they can’t get anywhere else.” “In my mind, the best quote of the century about being competitive comes from Sam Walton himself. And he said, ‘If you want to compete with me, do what I don’t do.’” Toys“R”Us and Target both offer store-exclusive Lego sets. Kmart lets you dress like former Charlie’s Angel actress Jaclyn Smith. Macy’s and Nordstrom have deals with Madonna on “Trust or Dare” shoes. When your store is the only place to buy an item, you are no longer competing just on price. Differentiation does not have to be based on product choice or assortment. It can also involve a unique approach to customer service. Zappos CEO Tony Hsieh has adopted the unorthodox policy of having his call center representatives direct disappointed customers to three different competitor websites if Zappos is out of stock on a certain size or style of shoe. “Yes, we lose that transaction,” he explained to an audience at a South by Southwest Interactive conference. “But we’re not trying to maximize every single transaction. We’re trying to build a lifelong relationship with each of our customers – one call at a time.”4 When you are offering items that can be bought from several other competitors, using Dynamic Pricing, which is the act of pricing items based on variable market conditions, you can ensure that customers perceive your brand as being fair. With the right Pricing Intelligence solution, you’ll know which highly price-sensitive items need to be discounted, which ones can remain unchanged and which ones are ripe for increasing profits. Yes, Amazon is far ahead of the retail pack. But there’s good news: According to a January 2014 study by RIS News, most of that pack is sitting on the couch.5 Consider these findings about the current use of Retail Price Intelligence: Only 23% of surveyed retailers are using Price Intelligence software right now. An additional 29% of retailers plan to deploy Price Intelligence tools in 2014. A stunning 42% have no plans to use Price Intelligence software at all this year. As mentioned earlier, even the most sophisticated technology is useless without the right strategic thinking. But if you want to stop being reactive and start being proactive with your pricing, there’s still time to get on board. Acting on the right Pricing Intelligence will help you avoid the Price Match Trap. Chapter 3: An Introduction to Pricing Intelligence The Myth: Store-Based Retailers Only Need StoredBased Intelligence As strange as it might seem in the computer age, the pencil-and-paper approach to intelligence gathering is hardly extinct. Competitor Price Monitoring has been around in various forms almost as long as retail itself. This is primarily because whether you are running a consumer electronics store or a neighborhood lemonade stand, your customers will likely flock elsewhere if they can conveniently get the same products at a lower price. Traditionally, brick-and-mortar retailers have sent employees into competing stores with a checklist of key products for price comparison and then decided if their pricing needed to be adjusted accordingly. Retailers can now outsource this cumbersome task to mystery shoppers or retail data collection companies; however, they still can’t avoid putting people “on the ground” since not all stores put all their prices online. Conventional wisdom among store-based retailers has been that only physical visits to competing stores will produce the most meaningful competitive data. Indeed, that method is still important, but brick-and-mortar retailers also need to include online price monitoring on their radar. With very few exceptions, online retail prices now reflect in-store prices. Only caring about pricing data from physical stores is like pretending your customers don’t know about the Internet. You need to be thinking about pricing the way your customers and competitors think about pricing. You need to be looking at the same numbers they are. Amazon is making price changes more than a million times a day. Walmart and Target evaluate the pricing on their Key Value Items (KVIs) every two hours. By gathering online prices, retailers can regularly and accurately monitor all targeted competitive products instead of focusing on a select few. Without the limitations of physical store price-checks, there is virtually no limit to the number of SKUs that can be monitored online across any number of relevant competitors. Online price monitoring gives retailers a holistic view of the marketplace – including comparisons of the original product price, the MSRP, the promotional price and the price with and without shipping. According to a recent online shopping study by WorldPay, a global payment company that processes transactions in 120 different currencies, 56% of customers will abandon their shopping carts when presented with “unexpected costs” like shipping or taxes at checkout.6 It is critical to make sure you always monitor competitor prices with shipping included. There is a wide variety of shipping policies online: What Does “FREE” Shipping Mean? Minimum Purchases Required By Retailers *Both Belk and Target offer free shipping for store-branded credit card holders **Order must be under 20 lbs. Source: Retailers websites There are many other shipping factors to consider when trying to understand the psychology of your customers. Most free shipping policies do not include large or bulky items, such as furniture or lumber. Many retailers will also offer free delivery to any of their stores for customer pickup. Lastly, Amazon Prime offers “free” twoday shipping for $99 per year. For smaller purchases, a discount of a few dollars will be neutralized if the shopper needs to “give the money back” at checkout in shipping costs. Most people are even willing to absorb a minimal convenience fee – paying a small amount more – if it means getting their purchases now. Customers who compare prices in physical stores (also known as showrooming) pay close attention to how shipping affects their bottom lines for online purchases. Make sure you’re paying close attention, too. The Four Stages of Pricing Intelligence: Turning Numbers into Action This may sound obvious, but when you’re making a salad, it’s optimal to use the freshest lettuce, tomatoes and cucumbers available. No matter how good of a chef you may be, using wilted vegetables will result in a rotten salad. The same principle applies to Pricing Intelligence data.You need to refine your raw data so it’s ready for your analysts to turn it into real intelligence – inaccurate data will lead to faulty pricing recommendations. Here are the steps that are needed to turn your numbers into action: 1. Gathering Prices – Web crawlers continuously scrape competitor sites for products, model numbers, prices and other characteristics. 2. Enriching the Data – Using automated tools and retail category manager expertise, your products are matched or “mapped” to the same or similar products sold by competitors. Price comparisons are only valid if you are making apples-to-apples comparisons. 3. Analysis & Recommendations – Using historical sales data, retail analysts build pricing models that explain past performance and predict future trends. The pricing formulas determine the optimal price where sales and profits will be highest. 4. Taking Action - Analysts recommend that prices be raised, lowered or kept the same based on competitor price changes and your own consumer demand and expectations. Unfortunately, most pricing data is not ready to use when it’s first delivered by web crawlers. For example, computers can instantly compare the prices of every iPod in the universe as long as the UPC codes are listed. But given that Apple seldom discounts their products, the more significant question is: Which competing MP3 players are most comparable – which ones will be most likely attached to your customers’ earbuds if they go with Plan B? Making matters even more complicated is that shopping for consumer electronics (and many other categories) often involves three sets of prices: Manufacturer’s Suggested Retail Price (MSRP), sale price and the secret “click here” price. Many product pages on e-commerce sites show you their list price and then invite you to move your mouse over the item or click on a shopping cart to “See Price at Checkout.” The reason retailers do this is to avoid Minimum Advertised Price (MAP) violations. Some of the more premium brands forbid stores from advertising their products below a certain price threshold – to avoid cheapening their brand equity. Many retailers have been happily using automated web crawlers to gather competitor prices, but most of these tools are rapidly becoming antiques. Your technology now needs to “see” these hidden prices. It needs to capture this deep data by replicating the behavior of the online shopper. Once you’ve refined your data with the right automated tools and analyst expertise, you can then act on your intelligence. Pricing Intelligence tools identify the best opportunities for increasing margins, giving you a snapshot of which products are the most price sensitive at any given moment. Taking Action: What Can Be Learned From Pricing Intelligence? During the 2013 holiday shopping season, we took an extensive look at pricing data from 15 major U.S. retailers across 13 categories, including clothing, toys, consumer electronics, fragrances, cameras, kitchen appliances and vacuum cleaners. (You can read the full report, “Revealed: Retail Strategies of the 2013 Holiday Season,” here.) November and December of 2014 was a banner time to be purchasing clothes for girls. Ugam’s seven-week pricing analysis revealed that girls’ clothing was the most frequently and h...
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