Pricing Challenge. Part 1
Pricing problems grocery retailers face

With the rise of the Online and thousands of prices available for customers to compare 24/7, retailers' pricing strategies face new challenges. Is yours ready?
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?

Pricing rules often contradict one another

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.
Rather than posing a rule-optimization dilemma, pricing systems should allow for flexibility. Not only should it be possible to prioritize between rules but both rules and prioritization itself need to be flexible. This way retailers can still meet tactical objectives by embracing relevant rules and fulfill their strategic goals by optimizing price for business metrics.

Promotions are excluded from pricing systems

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.
Promotions are among the leading revenue and loyalty sources for modern retail chains. Being part of retailers' business routine, promos should as well be integrated into the price optimization software.

Growing pressure from online

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.
With intelligent pricing, the repricing process can be fully automated and integrated into the planning routine: from optimizing price tags to placing automated orders to the retailer's replenishment system. This, once again, requires major upgrades of the existing price optimization software.
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.
Alexey Shaternikov
CEO and Chief data scientist at DSLab

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