At the risk of getting into a messy analogue, why are any wars messy? Without exception, it is because the weapons used are ill-directed and based on poor intelligence. I won’t go on...
Price Wars are a bad thing for retailers. There have been 2 or 3 occasions here in the UK in recent years where a Top 5 retailer’s share values have taken an immediate dive as a result of the announcement of a price offensive: ‘Thousands of Price Cuts to benefit consumers’. The simple fact, though, is that most retailers simply do not have the means to assess whether any particular batch of price cuts has delivered the hoped-for business targets.
There are too many inter-related factors: substitutions, cannibalisation, halo effects at the item, department and store level. Even consumers could not tell you with accuracy whether any price campaigns have genuinely benefited them in the medium term.
Optimisation technologies can now provide scientific tools to propose and analyse promotional activity – but strangely, not all retailers are ready and willing, or indeed able, to adopt these new techniques.
The long-term winners in Price Wars – where everyone is fighting on several fronts – will have a set of attitudes as well as technologies quite distinct from those who will eventually lose out.
Losing retailers will typically consider that price is not a strategic focus: their price decisions are fragmented across the business and hampered by poor communication. These retailers have their price planning and tactics driven by the competition and tend to have little data available to support fact-based price recommendations. And worst of all, there is limited or no visibility of the overall effects of their pricing decision and a culture of repeating past practices. The simple fact that a 1% improvement in price will have between a two-fold and four-fold better impact on profit than either variable costs, fixed costs or sales volume may be understood but cannot be acted upon.
By contrast, leading-edge retailers do see pricing as strategic and one of their key marketplace differentiators (along with positioning, promotion, place, planning…). To drive this, the price decision would typically be owned by a centralised group, with significant involvement from cross-functional groups, and with scientific/academic credentials. Importantly, these retailers segment their estate by behaviours and pricing power – giving them price zones. This enables them to evolve (and that’s the key word) pricing strategies supported by end-to-end planning and impact analysis: their smart guys may well wander around using terms like ‘heuristic models’. Sales data is analysed at a granular level to provide insight into how consumer demand changes due to movements in price - and other factors: maybe external factors such as weather and events, or internal factors such as other category activities. Price change impacts are continuously monitored and their tendency to deliver the retailer’s business objectives is continuously gauged.
KPMG/SPL’s assessment of Price Wars is damning. They are typically tactical and reactive – ‘knee-jerk’ to you and me - rather than positive re-merchandising or genuine clearance. The resulting changes in behaviour erode ‘shopping experience’ - which is absolutely not in the retailer’s interest and untenable in the long-term. Price War promotions make retailers’ future prospects less transparent and predictable and can simply result in ‘Sales-growth-by-value’ dropping – a trend that can’t be sustained ad infinitum.
So, Price Optimisation – implemented and supported properly – provides the opportunity to replace the old blunt tools and guesswork of price campaigns with surgical, learning technology that can respond to micro-market demand. In practice, it really can respond to consumer reaction: providing dynamic, ‘real-time promotions’.
But the weak link in any technology is of course when it is reliant on people. The majority of plane crashes are either caused by people, or by people reacting inappropriately to suddenly changing conditions.
With price and promotions, a scientific decision can easily be compromised - and any intended benefit lost by delays or errors. Electronic display technology such as streaming media and graphic Electronic shelf-edge labels (graphic ESLs) can reinforce promotions. When scientific Price and Promotions management is coupled with an unrestricted shelf display system, Price Wars need never break out.
Jann Naef
Product Marketing Director
Jann.naef@zbdsolutions.com
