Pricing Challenge. Part 1
Pricing problems grocery retailers face

Along with brand loyalty and food quality, the competitive price remains among the top-factors influencing consumer's purchasing decisions foremost. Needless to say, pricing strategy plays a key role in securing revenue streams in every retail chain. There are plenty of time-tested pricing methods that grocery retailers utilize. However, online shopping has brought wider product ranges and uplifted the competition in the industry. With thousands of products and prices available for customers to compare 24/7, retailers' pricing strategies face new challenges. Is yours ready?

On the operational level, pricing usually looks like a set of complex, interconnected rules that a planning department or algorithms - depending on the pricing method retailers use - should follow to put a tag on each item. To make sure that the price meets retailers' best interests, it is then optimized by a certain parameter with margin or receipt total being among the most frequently used. Voila, the price is set!

Trouble is the rules used to determine a price in the first place often contradict one another. Take, for example, yogurt. While the retail price for various flavors within the product line is usually the same, the procurement price is different. Another example is pricing rules based on minimum margin requirements. Imagine, that a new discounter opens nearby an "availably priced" grocery store. Margin requirements don't allow the grocery store to lower prices significantly enough to keep its customers and compete with a new rival. To make things worse, the optimized price may contradict the initial rules as well. If this is the case, should the planner violate the rules or overlook the optimization parameters? Considering that planners conventionally get fined for a rule violation, key business metrics take a back seat.

Promotions and discounts are significant elements of achieving retailers' goals, be it getting rid of excessive inventory stock, increasing basket size, driving traffic to the store, or keeping customers satisfied. With over 60% of goods being on offer constantly, sales promotions are a new norm.

We all love promotions. From a consumer perspective, apart from saving money, promos have another crucial feature: the novelty effect. Visiting the same hypermarket every weekend can be boring, and while grocers cannot afford to change assortment every now and then, they can entertain consumers with new deals.

• How often retailers need to update promos to keep this novelty effect?
• How often they need to rotate assortment on promotion?
• When is it the right time to run a promo?
• How many promos do retailers need to maintain customer loyalty without becoming an ultimate destination for cherrypickers?

Ideally, pricing systems would answer all these questions and present a planner with a number of alternatives and their combinations. However, existing price optimization software just doesn't account for promos and item cross effects that follow. Consequently, promotions may jeopardize - and even cannibalize - sales of other assortments.

In the era of Amazon and alike, brick-and-mortar retailers face the challenge like never before. Not only online grocers win consumers with hustle-free shopping from the comfort of ones' home, but they also offer the best - or, rather, optimal for both consumer and grocer - price.

Instant price changes to thousands of items and dynamic prices optimized for both internal and external parameters, such as time of day or weather, are among the perks of online intelligent pricing. Compared to these, even daily price changes by offline stores are not enough. The good news is, with electronic labeling readily available, intelligent pricing is expanding from online to offline.

At DSLab we believe in better pricing systems. We question standard pre-set rules of pricing software and challenge price optimization algorithms to create the next-generation fully integrated ML-based pricing system. The system capable of automating the pricing process and solving all the listed above. To know how we tackle the pricing challenge, stay tuned for Part 2 of the article.