View My Stats

Innovative Category Management

Authored by Balakrishna Parankusam

Recently there have been a spate of debates within our circle of retailers on the relevance of Category Management in the face of waning brand loyalty and increase focus of CPG Cos. on non core brands.

Read on for my take on this topic.

Being associated with one of India's leading retailers, I had this opportunity to work with many companies who not only preached but also practiced CM.

It is important for the Category Manager to lay down his goals first as to how best he can derive benefits out of CM.Once the path is set, then it becomes easy for the manufacturer to go down this path and ensure that he innovates on his way to the goal.

Innovation could be in the form of category specific promotions or activities that would increase customer recall and benefit the overall category. It’s the onus of the Category Captain to push for innovation with active involvement of the Category Manager. Procter and Gamble for example had run an in store activity wherein they had installed a television and a hand held device to gauge the quality of hair of the customer and then suggesting him the brand or type of shampoo suitable for her hair. This activity was a huge success, and this increased the excitement factor towards the Shampoo category.

CM is sometimes the victim of the agreements, which the retailer has with the CPG companies. Assortment rationalization is done keeping in mind the mutual benefits and relationship building objectives in mind. This ends up including non - performing SKUs which otherwise would not have found space in the assortment planning.

CM goes in sync with effective promotion and in store activity planning and creates excitement through innovation within the category.

Contributed by Sirish Mellacheruvu

One of the very important concerns of Indian retail has been the lack of processes and systems, even in a few organized retailers. Thankfully there are a bunch of Indian retailers, who do have an organized way of operating the business and also do exercise controls over the systems at regular intervals.

In this scenario, if the Indian retail has to emerge competitive in the arena of competition coming in from the likes of TESCO, Metro cash & carry, Shoprite etc, its is imperative to develop a strong foundation of practices, which rely on systems and processes, minimizing human intervention and error.

One interesting point in this regard is that even though a few retailing companies in India have a strong system and process orientation, better than the other companies of Indian origin, it cannot be said that this can make them competitive with regard to the multinational companies.

This is where the Outsourced work from the International retailers comes into play. Since a lot of functions like Space management, assortment optimization, Product sourcing etc are being outsourced to countries like India and China, it is good that the retailers map their standards, using this, to the process standards of International retailers. For example, promotion analysis is one important area for the international retailers, which helps them gauge the performance of the promotion implemented in the store. In India, most of the retailers do not even look back and see whether the promotion has given the mileage expected. This kind of comparative study, at this juncture makes Indian retail ready to run, with the International players.

The question now arises, why do we have to do it? Because, we are in the race to provide the customers, the best!!! The best in range, the best in promotions and provide the best experience. This will help us bring in customers or retain the existing customers

The outsourced retail functions need be mapped (also respecting the confidentiality in required cases) and localized to suit the Indian market.

Since the industry is getting hotter with the advent of new players (Birla being the latest to join the fray – Source Kumarmangalam Birla’s Interview in a news channel talking about his interest to get into retail), they need to do a lot of work in strengthening their systems before they go LIVE!!!!

A comparative study of Wal-Mart & Carrefour – Strategies in Asia

Sirish Mellacheruvu

Came across an interesting article. Thought i should share it with you...
This has been written by a couple of chinese authors. I have tried presenting a gist of it

Wal-Mart was founded by Sam Walton adopted a circumventing strategy by starting their operations in small towns and then moving on to bigger cities. They maintain lowest price everyday and promises customer satisfaction together with high quality suppliers’ cooperation and prompt delivery to grow continuously at marked rates. Public offering begun in 1970, Wal-Mart then extended operation around the States and further expanded across borders. Wal-Mart today has branches in Canada, Mexico, Brazil, Argentina, Porto-Rico, UK, Germany, South Korea and Mainland China. It employs over 1.3 million employees in the US alone and has sales of 315,654.0 $ millions and profits of over 11000 $ millions. An of course the big fact that it always ranks in the top 5 listing of Fortune.

On the other hand, Carrefour initiated the idea of “hyper-market� in 1959 that stressed mass-sales, low delivery cost and discount everyday to achieve high rotation. Other key success factors include one-stop shopping, low selling price, freshness, self- service and free parking. It went public in 1970. Latest it has 12028 stores and more than 440 thousand Employees. The sales reached 78 billions and made it as the largest retailer in Europe.

As for their operations in Asia, Wal-Mart had established its footholds in Thailand, South Korea, and China. By contrast, Carrefour had extended it services to Taiwan, Malaysia, China, Hong-Kong, South Korea, Singapore, and Indonesia. Compared with westerns, Asia customers tend to buy impulsively rather than as planned and concern more price than package.

Strategies in Asia:

The increase in buying power in Asia since 1980, lead to both supermarkets and the hypermarkets, not being able to meet the requirements of one-stop shop buying and shopping as leisure. Consequently large number of mass retailers emerged providing customers with the price advantage on buying more and one-stop shopping .

Carrefour moved into markets like Spain, other parts of Europe, America etc that helped to accumulate a lot of international experiences. These experiences enabled it to win over Wal-Mart in emerging markets like China.

In contrast, Wal-Mart internationalized slower than Carrefour. But Wal-Mart also targeted China as the most promising market and started operating its first store in Hsang-chuin city in 1996 by supplying full range offerings and friendly service to win customers’ trust. At present, Wal-Mart has invested more than 1 billion dollars and employed more than ten thousand employees. It also considers China as one of its critical procurement center and more than 90% of their products sourced there to serve customers’ needs in the whole world

Marketing and Service Strategies

Wal-Mart built differentiated business departments to serve different market segments. As for Asia operations, it mainly uses supermarkets supplemented by warehouses. The major factor of Wal-Mart’s success is built on “lowest price everyday� practice that significantly reduces searching cost. Further, its high quality at low price offerings has won the reputation of high value-added company and loyalty of customers. Therefore, Wal-Mart could reduce expenses on advertisements and promotions and also increase turnovers of products. Wal-Mart always believes that customers always come first. Even in Asia, all employees follow three management philosophies—respect everyone, serve customer, and search for perfection. They fully carry out the practices of 8 teeth smile, ten-foot rule, and sundown rule; provide 95% products as a minimum for 95% of time. All these practices have become the benchmark of the retailing industry.

Carrefour adopts two-stage philosophy both in France and Asia to achieve stable growth. At the 1st stage, to enable branch stores to smoothly operate as fast as possible and to maintain high turnover. Carrefour decides to set up a new store after the investigations of location, store space and neighboring purchasing power. For example, it built a whole-selling or green store in industrial region and a general retailing or blue store in residential ones in Taiwan. By adopting this strategy, Carrefour could capture both big and small accounts in one shot and then grow much faster than its rivals like Makro.

At the 2nd stage, Carrefour focuses on customers, personnel training and market channels. It gradually enhances service quality, product innovation and emphasizes personnel cultivation. It further adopts strategic alliances to develop private label products to supply more offerings so as to meet the needs of one-stop shopping. At the same time, utilizing the system of commerce automation to centralize the purchasing matters of all stores, Carrefour could coordinate orderings, stock management and data processing for better control and decision-making.

In a summary, the key success factors for Carrefour are: one-stop shopping, extremely low prices, full range of choices, self-service, free parking. To Carrefour, price does not equal to competitive advantage but an essential means to survival. To maintain lowest price reputation, Carrefour keeps reminding customers to refund if they buy more expensive in order to comfort their purchases. To meet the nature of impulse purchase of customers in Asia, Carrefour chooses mass-selling, low delivery cost and promotion to attract and retain their buying. On the other hand, Carrefour also follows flexible pricing to reflect the differences of local markets. Weekly purchase has become part of daily life for customers in Asia; Carrefour provides wider shopping space and parking lot to make customers’ buying more convenient. In addition, it delegates each stores, as profit centers, to decide what to purchase, pricing and promotion strategies and constantly stresses discount everyday that is very different from that of Wal-Mart’s.

Physical Distribution and Digitalization Strategies

Wal-Mart has spent more than half billion dollars in information technology facilities to connect their worldwide stores with headquarters. Meanwhile, they request suppliers to adopt electronic data interchange system. With this system in place, Wal-Mart can transfer information swiftly and has saved three fourth stock-holding costs. Further, headquarters can finish stock-taking of each item for more than 4,000 stores in the globe within an hour. At present, each store sends information to his suppliers via internet and have products replenished in on-average two days versus five days of their rivals (Huey & Walton, 1992).

Comparing with Carrefour, Wal-Mart has a complete storage management system. Their transportation and logistics system, especially cross docking, are well known. This method enables Wal-Mart to replenish goods twice a week (once bi-weekly to their rivals) and reduce storage space and delivery time. As a result, Wal-Mart can reduce stock-carrying costs and transportation and therefore increase profitability by 2.5% compared with their competitors (Stern & Stalk, 1998).

Wal-Mart cooperates with NCR to construct quick response/efficient consumer response system (QR/ECR) to strengthen the supply and replenishment of each store. At the beginning, Wal-Mart has 7,000 gigabytes data that have been increased to 10 terabytes at present that make their commercial data bask as the largest one in the world. This QR/ECR system effectively facilitates the information exchanges among suppliers, Wal-Mart and their stores that substantially increase operational efficiency, customers’ satisfaction and profitability. Wal-Mart also has 6-channel satellites to do teleconferences and videoconferences to communicate with their stores and demonstrate their new products. Wal-Mart also cooperates with IBM to set a brand new on-line shopping site named Walmart.com. This site provides full range products from low to high price items. As for physical distribution, Wal-Mart allies with local retailers for customers to take what they have purchased at the website. In contrast, Carrefour, Sears and Oracle jointly built “global net exchange� supply-chain e-commerce system in 2000. Globally, more than 50 thousand suppliers conclude transactions electronically amounted to 80 billion dollars annually. Carrefour’s website in France had markedly started to provide foods, banking, touring, and win services at the end of 2000. Further, they will invest one billion Euros in develop their internet businesses in three years.

Human Resource Management Strategy
To treat customers friendlily, reduce cost, and educate employees are consistently practiced in Wal-Mart both in the States and Asia. To treat new comers in the company fairly, make them perceive responsibility and participation and share information, the following enlightenment and inspiration measures are undertaken.

1. Education and training: Through learning by doing with superiors in the first 16 weeks, new staff can accumulate experiences and skills. They can also take courses supplied in the Wal-Mart Institute and have job rotation opportunity to enrich their expertise.

2. Regularly announce performance: Each store has to announce its profit, purchasing, sales and percentage of discount regularly to make all employees informed.

3. Profit sharing: Employees who has worked in Wal-Mart for more than one year and worked over than 1,000 hours are eligible to this profit-sharing scheme.

4. Stock option: Allow employees to buy Wal-Mart stock at 15% off the market price

5. Benefit-sharing from reduced depletion: If depletion of stocks could be controlled within the limit of target, each employee will be awarded maximum 200 dollars.

6. Motivate and challenge his/or her partners for better ideas everyday.

7. Cultivate employees with ambitions to become a leader of stores within a store.

8. Assist employees to conquer operational difficulties in pursuing their goals.

In contrast to Makro’s localization strategy, Carrefour stresses more on the hand-down of corporate heritage. In the early stage of foreign market entry, Frenchmen take the positions of top-level management constantly to infuse management philosophy of “serve customers� and “action orientation� into each store overseas. When walk into any stores of Carrefour, you will see many staff walk around to replenish stocks all the time. The manager in charge of a store also wanders around the store once it is open.

Comparison of Strategies

From the comparisons of strategies in Asia of Wal-Mart and Carrefour, this study summarizes the common and different part of their strategies. They all adopt the same strategies in the following practices.

Firstly, both stress the culture of humane and provide employees with best career planning, education, training and incentives.

Secondly, supply products at lowest price but highest value-added every day to reduce the searching cost and build trust and loyalty of customers.

Thirdly, localizing sourcing to reduce transportation expense and exploit economies of scale.

Fourthly, emphasize the creation of friendly atmosphere at every store where employees wander around to replenish goods and see if any assistance required.

On the other hand, differences in Asia strategy are reflected in the following facets.

First of all, Carrefour internationalized earlier than Wal-Mart, the former established as many stores in big cities as possible but the latter adopted “circumvent cities from countries� strategy to steadily cultivate talents and accumulate experiences.

Secondly, Wal-Mart emphasizes “lowest price every day� to win the best corporate image but Carrefour focus on “discount every day� to attract customers to buy impulsively.

Thirdly, basing on the concept of “every day low costs� (EDLC), Wal-Mart implement cross-docking technique simultaneously to increase operational efficiency and control cost in global logistics. Carrefour, on the other hand, can only rely on the flexibility from local procurement of individual stores to exploit the benefits of localization because they do not yet established global logistics system.

Finally, Wal-Mart has various stores that include American discount store, supermarket, Sam’s Club membership warehouse, and drugstore by the streets based on the characteristics of customers. As for Carrefour, most of their stores are discount ones but they also develop a mixed strategy nowadays.


Conclusion

With these big guns planning their entry into India, it is good to know the way these companies operate and the benefits that retail professionals would be gaining in near future.

IT DRIVEN PRICING - The road to Profitability

Anupam Raj Gautam & Aakash Pahwa

Introduction

“Today’s economy is pushing people to find every opportunity they can to improve profitability. In the1990s, most companies attacked cost. Pricing remains one of the few untapped levers.�
- McKinsey & Company


Billions of dollars have been spent to automate and analyze just about every other area of modern business. While retail chains have already focused heavily on improving cost side of operations, huge opportunities of improvement remain on the demand side. In the past retailers in general have not had the data or capabilities or process discipline to develop an effective, fact based approach to pricing. But as the market factors combine to place enormous pressures on profit margin, the process discipline is emerging, along with new IT techniques and capabilities for demand-side solutions built on the wealth available from scanning data and historical databases. One area that is unarguably significant and most left out is the impact of pricing on profitability.

Three profit drivers:

Profit= price * volume - cost

Price = Not yet professionally optimized

Volume = Limited possibility of increase , saturation, market share pressures

cost = Largely exhausted

McKinsey & Company estimates that a 1% improvement in price provides the largest margin increase (more than cutting costs, managing your inventory differently, etc.). It can provide up to as much as an 11% increase.

Typically a 1 percent improvement in pricing can lead to an 8.2 percent improvement in operating profit, significantly higher than for a 1 percent improvement in variable cost, volume or fixed cost says AT Kearney.


In the following pages we will address some of the approaches to pricing, best pricing practices, their impact on the business as whole and how technology can assist in harnessing and leveraging the true powers of pricing.


Don’t underestimate the profitability driving power of pricing

Pricing effectiveness rarely receives the attention it deserves. Just a handful companies approach the subject in a truly disciplined manner. A senior executive of one of the leading US automakers is cited by the Boston Consulting Group as saying, “We have over six thousand financial controllers watching our costs, but less than one hundred people working on price management.� Responsibility for setting prices is often spread across marketing, sales and finance. The resultant decisions are based more often on intuition than on facts and poorly managed process involving contradictory discussions leading to further complication.

Careful analysis highlights the need for incorporating the following three important aspects when formulating pricing decisions:

Capitalize fully on the value created for customers

Most companies tend to build their prices by adding what they feel is a reasonable margin (needed for their year-on-year growth, return on investments and sustaining and/or growing stock value) to their costs. In doing so they actually could be giving too much away to the customers.

Price must not be set based merely on margin objectives. It must capitalize on the value created for different customer segments. To maximize the returns on its pricing, a company must first understand how it creates value for its customers. It must ask itself questions like – What is the value of a given customer advantage? Is this value different for different customers? How much are they willing to pay for different variants of a product or service? The answer to these questions helps match prices more closely with what customers are willing to pay.

The price customers are willing to pay for goods and services has little to do with what they cost to produce.
Three things must be done to capitalize fully on the value created by a product or service:

1) Measure the value created for customers

The most direct way to evaluate value for the customer is to quantify the economic benefits gained from the product or service. This approach requires breaking down the customer’s economics. Ask questions:
ü What are the principal cost items for the customer?
ü What is the main source of customer revenue?
ü How does the product or service help the customer control costs or boost revenue?

Finding the answers to these questions often requires in-depth interviews with individuals or focus groups, purchasing data analysis, simulation, expert / subject matter consultation.

Case Study

An insecticide manufacturer observed that some farmers used its product in combination with another one. A ready mixed product containing both ingredients cut spraying time by half. The company therefore decided to market this combined formula at a much higher price than the cost of purchasing each product separately, considerably boosting margins as a result.

2) Adapt the offering and prices to different customer types (segmentation opportunities)

Segmenting the offering helps determine the maximum price that each customer segment is ready to pay. Depending on their needs, different customers may be ready to pay very different prices for the same product or service.

Depending on the industry, there are several ways to segment the offering to optimize prices depending on the customer type. This is generally done using variants on the basic offering or connected services.

Case Study

A commodity-metals manufacturer noted that different customers valued its products according to very different criteria. Some required very close compliance with specifications, while others valued technical support or fast delivery. The manufacturer therefore decided to set different price levels depending on guaranteed services or slight variations in the basic product. This approach tripled margins on part of the offering, without affecting sales volume.

3) Make customers recognize and pay for the value they receive

Customer will pay only for the value they perceive in the product. This approach should reflect in your company’s product(s) pricing. Even when customers are supposed to make choices based on objective economic criteria, they often have only a vague perception of the value they receive. Studies have repeatedly shown this to be true on markets like retail (customer loyalty schemes), medical equipment, dedicated phone lines, professional financial services. One efficient way to enhance the perceived value of an offering is to use hard facts and figures to correct flawed perceptions. When selection criteria are not purely economical, customers must be made aware of the value offered.

Case Study

DuPont reacted to market disinterest in a new plastic resin used to produce more robust irrigation pipes. The company quantified the cost of a complete irrigation system lifecycle. It then highlighted the significant gains linked to reduced maintenance work, and particularly in terms of avoided crop damage. As a result, not only was DuPont able to raise prices by 7 percent, but also doubled sales the following year.

Beware of subtle margin shrinkage

Margins slip as a result of misconceptions about costs and/or a lack of discipline in applying the sales policy. This dimension should also be closely monitored.

Increasing Costs

A company should not only know and/or understand the value of its offering(s) to its customers, but also the costs associate with its each customer segment. Two different customers willing to pay the same price for the same product may generate very different margins. The goal should be to understand the costs generated by different purchasing behaviors and usage of complementary services. Companies generally capture the average cost of the base offering and leave the analysis there. Ask questions:
ü What is the extra cost involved if the customer buys less vs. if the customer bought more?
ü What and how much is the impact on margins if a one time customer were to buy vs. a loyal customer?
ü What would be the impact on margin of a customer that requires tight deadlines?

Unfortunately most companies today do not have the answers to these questions.

Avoid Price Wars

Price wars are not always triggered by a deliberate decision to attack competitors on price. Most times simple errors in judgment or simple mistakes are the real culprits. Make a note of the following points to be away from what is one of the most lethal industry weapons:


Potential impact of pricing initiatives on the competition
A common error by most companies is to define the pricing policy with the inherent assumption that market prices are unchallengeable. However, any pricing decision is likely to spur a competitive response, even if the company initiating the measure doesn’t feel it is being aggressive toward competitors.

Be Communicative

Some price wars are triggered by simple misinterpretations. These can simply be avoided if the companies carefully and openly announce their strategy and prices. For example, some retailers publicly commit to offering the lowest prices. This is paradoxically a good way to avoid needless conflicts, because competitors know that trying to compete on price would be pointless. So, when all competitors announce that they will match the lowest price on the market, prices are sometimes observed to rise gradually as a result.

Understand the competition

A thorough understanding of the competition is a valuable asset, whether to anticipate their potential reactions or interpret their decisions. Companies must therefore possess more than just superficial knowledge, and systematically collect all available information on the market. Huge errors can be avoided by following this advice.


Consider alternatives to a frontal attack

As a general rule companies are encouraged to consider alternatives to a frontal attack. However careful a company may be, it is one day likely to be attacked on price by a competitor. The best response may be to reduce prices in turn: when the company has a distinct cost advantage, or when its very survival is at stake. It is important that companies have a back-up plan or an indirect plan to sustain in turbulent price war situations without destroying profits. Some possible approaches could be:
ü Focus the offering on a niche that is not under attack
ü Create a separate low/high end brand
ü Sign long tem contracts with customer focusing on guaranteed quality over time
ü Start a communication campaign to make customers aware of the dangers of low-price offerings

Little effort on setting the right price

Why do companies expend so much energy on the first part of profit making process – creating value for customer through research, product development, manufacturing, distribution – and then so little on setting prices?

The good news is that this is starting to change, thanks to the efforts of a new breed of academics, consultants and technologists. Sophisticated pricing methods once only used in the airline and hotel industries have started to migrate into other sectors.

On the other hand, the bad news is that setting the “optimum� price still remains rather difficult – irrespective of what the company is selling. Most companies lack the information system and management process to get it right consistently.

It’s just not about cost

When profitability becomes a problem, most companies start focusing on costs and underestimate a very powerful driver of profits – effective pricing strategy.

Companies often have as much room for improvement on the pricing front as they have on cost front. This is because, more often that not, pricing decisions within companies are usually the result of messy interaction between marketing, sales, production, accounting and finance, not to mention business partners such as distributors, wholesalers and retailers. Add to that the fact that - all these internal company departments and external business partners have different versions – rather than systemic efforts to build a relevant pricing strategy. Till date pricing has been focused on putting a lot of Ph.D.s in a room to determine what the price is, but 70 to 80 percent of pricing actually happens when the salesperson negotiates with the customer.

Instead of just thinking about selling more, look at the bottom line – focus on profitability

The times have changed and so should the attitude towards doing business. Competition is stiffer than ever, there are more products available today for a single category than the market demand could possibly justify, and every retailer seems to be promising “low prices�. Companies need to decide where they want to put their future efforts. Do they want to sell more or sell smart? Companies should invest their dollar where they can get maximum return. And how exactly does the company figure out where do the returns lie? That is the question most companies are faced with today. The answer lies in the tons of valuable data the company has amassed over years. The smart thing to do is to make the fullest use of that data to find answers. There are plenty tools available in the market today to empower the company to cut open its data.

Case Study

Mike Jarmusz, CEO of A P Wagner, an appliance parts distributor in Buffalo, N.Y., was surprised when he cut open his numbers. The company management’s main concern: 85% of his 175-person company’s $35 million in revenue coming from its wholesale business. Mike realized that the company’s smaller retail arm was much more profitable than he thought. A Houston based company; Acorn Systems, pricing software empowered Mike to dig up this information and strategize for the future based on the results. So he poured more money into local Yellow Pages ads and increased the stock at its 20 branch locations to keep up with demand. Both wholesale and retail sales and those locations increased.

Leveraging technology to enhance pricing effectiveness

Case study

The 278-store Canadian apparel retailer usually reduced the price of winter outwear by 30%, but instead kept the merchandise at full price during the 2002 holiday shopping season and generated additional bottom-line for the company. Thanks to the pricing software deployed with the Canadian Retailer which helped the company to break the traditional mould and set prices based on consumer demand and not on seasons.

Case study

Two weeks after the launching of multi-million dollar price optimization project, North Group Retail Ltd. achieved $60,000 additional gross margin on one product by replacing a hunch with technology.

But the scenario would have been different hadn’t the retailer followed the recommendations of its pricing software. Retailers all over the world loose billions of dollars in revenues due to untimely or unnecessary price discounts culminating to lost and dissatisfied customers.

Archaic Pricing Approaches:

§ Cost Plus. Simply taking the cost and adding a predefined margin with no real understanding of demand pattern and market positioning.
§ Matching competitors. Simply setting prices based on competitors strategy. This is double edged sword which may help you to regain or retain market share but definitely at the cost of eroded bottomline. Apart from eroded bottomline and confused product positioning the company may be caught into the vicious pricing loop to keep up with competitors leading to further drop in prices and margins.
§ Gut feel. A simple guesswork that may come out of years of functional experience, simple spreadsheet calculations or feedbacks and anecdotes from field sales force.
§ Markdown. The approach focuses on price discounts to generate volume and thus turning nelson’s eye towards profitability.

Pricing is a strategic business lever and if misused can lead to an organizational sabotage. The companies should refrain from traditional pricing approaches and should start working towards a more fact based pricing approach to strengthen their bottomlines.

Pricing: An Enterprise Wide Approach

Developing a complete pricing solution involves tackling the unknowns and complexities associated with pricing. Following are some points that should be addressed while developing a complete pricing system:
§ Pricing cannot be looked in isolation. Retailers need to take a comprehensive look at their entire business process and identify the components which act as price influencers.
§ Work at all levels within organization with regard to issues, obstacles and decisions which influence pricing through out the product life cycle.
§ Retailers should involve all key functional representatives across the business
§ Answers should be found on retailer’s strategy with respect to pricing, category, marketing, and advertising.
§ Gain knowledge about customer and price segments in which the retailer wants to compete and areas which the retailer wants to tackle.
§ Whether the pricing should be at chain, regional, or local level?
§ How sensitive are these products to price change?

The reason to go through these points is to look within the organization, specifically assessing its strategies, people, processes and technology relative to pricing activities. Doing so makes it possible to identify and prioritize opportunities to improve the performance of retailer’s pricing programs. This will also give an understanding on the complexity of the pricing problem depending on which a less high tech solution at reasonable cost or more sophisticated solution could be implemented.

Why an IT tool for pricing?

We have agreed that in devising a successful pricing strategy lays the key to profitability for business but do we really need to invest a few millions to get an IT tool.

Complexity of Operations. Retail chains are becoming bigger and are spread over large geographical regions. High frequency of purchase and a large merchandise range add further to the complexity. Setting an optimal price on an item level is an impossible task for the category manager. Category managers are able to achieve item level optimization for specific products, but when it comes to the category level optimization, their logics get buried under tones of POS data generated for each and every sku. Analyzing this data and mining it to derive useful business information is a gargantuan task for category managers. Most of the time they stick to spreadsheet calculations or on their experience or set margin standards to define price rather than a fact based retailing approach towards pricing.

Multiple Pricing Variables. It is said that consideration of pricing variables in pricing decision process changes upon whims and fancies of the manager or key representatives involved in pricing decision. This is true to an extent because there are numerous internal and external variables which influence pricing. Deciding a right price for a product means taking these variables into account and deriving a price. But the problem starts with considering the number of variables and the weightages assigned to them to form a correlation. Going further you need the expertise and patience to arrive at item level pricing for the entire range or store. A software engine using mathematical algorithms, weighing variables, customer demand, desired sales velocity, and target revenue needs would be more desirable to arrive at optimal pricing.

Dynamic or Smart Pricing. In a very fast-paced, volatile type of operation, a company’s demands can change on any given day and any point of time. A sophisticated software can help companies adjust to such changes without hurting margins. This can make a whole lot of difference when it comes to bottom line numbers. Flexibility is the key word here. Optimization software can be exploited to help companies make true the dream of Dynamic Pricing.

A study by Erik Brynjolfsson and Michael D. Smith at Massachusetts Institute of Technology found that while Amazon.com Inc charges less than bricks-and-mortar stores for books and compact disks, its prices remain substantially--and durably--higher than those of online discounters. Although discounter Books.com charged less than Amazon.com 99% of the time, its share of the traffic was just 2.2%. Tired of fighting a losing battle, Cendant Corp. (Books.com parent company) shut down Books.com and sold its name to Barnesandnoble.com Inc. What remains at the heart of this issue is Amazon’s smart pricing. Retailers need to start thinking about such efforts by looking at various industries and see how they can be replicated in their business models.

Micro management of Pricing. In the era of differentiation pricing plays a vital role to create a price positioning in the minds of consumer. Setting up the right price positioning begins with identifying “Price Image� items in the store. Lowering or increasing the price of such items can influence the buying pattern of customers. But still as large retailers are spread out geographically the price image items may vary across locations, and thus to create a price differentiation a store specific pricing is required. This seems cumbersome if the chain is large, say 1000 stores. On the other hand optimization tools have the capability to handle such complex issues and generate store specific pricing.

Proven Results. "Early results are encouraging. We think there are incremental [profit] margin opportunities associated with it.� That’s what Stephen Sadove, Vice chairman, Saks Inc. had to say on his company price optimization software from Spotlight Solutions Inc. in Mason, Ohio.
Steve Schwartz, a senior vice president of planning and allocation at Casual Male Retail Group Inc. in Canton, Mass., is also happy with the results of ProfitLogic; a markdown optimization software from ProfitLogic Inc. in Cambridge, Mass. According to Schwartz ProfitLogic has eliminated the need for "inches thick� reports showing stock-keeping unit, sales and inventory data that "would take forever to go through." The men's apparel chain initially sent two years' worth of data to ProfitLogic and now sends weekly sales and inventory figures by store. The optimization software does the number-crunching and produces markdown recommendations based on the region where a store is located. The only IT involvement from the company’s side was to get the data to ProfitLogic, which hosts the software and in return gets a monthly fee. Schwartz said the ProfitLogic system has helped his company improve its gross profit margin and the liquidation rate of seasonal items
Similar success stores have started to flow in from many other retailers across various channels. The Home Depot Inc., third largest retailer in the world, started testing a PO solution from ProfitLogic after hearing about its success with J.C. Penny and Meijer Inc. a US grocery retail giant.

Price Optimization

Price optimization is the process of optimizing price and inventory-order-quantity plan through more accurate demand forecasting. The prime aim of price optimization is to maximize revenues and/or profits by generating recommendations for price decreases, increases and to set negotiation guidelines.

Price optimization technology employs “advanced statistical modeling, forecasting, data mining, pattern recognition, and optimization techniques� that help companies determine how to achieve merchandising, financial and operational goals says AMR Research.
The software goes by several names – including retail merchandise optimization, price optimization, enterprise profit optimization, margin optimization, and demand and revenue optimization. AMR for example groups price optimization functionality under “retail revenue management�.
The four biggest Price optimization vendors – ProfitLogic(acquired by ORACLE), DemandTec, Khimetrics (acquired by SAP) and Spotlight solutions accounted for 80% of market share. ProfilLogic after acquiring the number two player Spotlight solution is the market leader in the area of price optimization.
For more than a decade, retailers have viewed price optimization tools as standalone solutions that can improve their revenues or margin. More recently the retail industry has been enthusiastic about employing price optimization software as a defensive move against “big box� stores such as Wal-Mart which have led the charge in this niche.

“Retailers have been able to increase sales up to 7% and gross margin by 1% to 19% in early retail optimization trials.�
- GartnerG2

“Companies on the leading edge of price optimization showed an average increase of 8% in revenue by June of 2004. Some grocers have reported a 2-3% increase in profitability due to price optimization�
- AMR Research
Price Optimization SoftwareFOR MARKDOWNS:ProfitLogic — Users include J.C. Penney, Casual Male, Meijer Stores, Old Navy, Northern Group Retail
Spotlight Solutions [1]— Users include Saks and ShopKo
i2 Technologies — Users include Best Buy and Payless Shoe SourceFOR SETTING EVERYDAY PRICES:DemandTec — Users include Longs Drug Stores, Big V Supermarkets, D’Agostino Supermarkets, D&W Food Centers, H.E. Butt Grocery
KhiMetrics — Users include Big Y Foods, ShopKo, Pamida, Winn-Dixie, Safeway UK

Major retail chains, including Best Buy, Home Depot, Gap, and Staples have all announced that they have Price Optimization programs currently in place from retail-oriented vendors such as Khimetrics, DemandTec, ProfitLogic and Manugistics.
DemandTec, which claims 14 customers, points to statistics showing that Longs Drug Stores Corp. in Walnut Creek, Calif., boosted gross sales by 1.9% and gross profit by 5.1% after eight weeks. D'Agostino Supermarkets Inc., a grocery chain based in Larchmont, N.Y., increased revenue by 9.7%, gross profit by 16.1% and net profit by 1% to 2%, according to DemandTec.
Solution providers like ProfitLogic have offered retailers like J.C. Penney markdown optimization solutions to help them reap the low-hanging fruit of better margins on end-of-season goods. More recently, retailers like Albertsons have invested in price optimization solutions that span the entire product life cycle — starting with initial price, when a new product is introduced, and ending with markdown prices that drive product clearance.

Different Winners Emerge For Different Solutions

While all five vendors offer functionality in initial, promotions, and markdown pricing, their strengths vary by module:
Khimetrics leads except for markdown. The best-of-breed vendor manages a narrow victory over DemandTec in initial price functionality and is the clear leader in promotions pricing. But Khimetrics rates third in functionality for the markdown offering, mainly for lack of inventory considerations, such as minimum presentation-level constraints.
i2 wins in markdown — with Manugistics not far behind. The two supply chain planning vendors lead in markdown functionality but lag in strategy and market presence mainly because of their newness in the retail sector compared with retail veterans DemandTec and Khimetrics.

Retek contends for the full suite offering. The merchandizing vendor continues to make progress in the pricing area, as a one-stop-shop retail solution provider. To succeed, Retek needs to improve the robustness of its solution — by offering it behind a customer's firewall — as well as its depth — by adding features like promotions optimization and partner visibility.

Price Optimization Adoption challenges

§ Organization and cultural rejection: Merchants and category managers have resisted black-box approaches and doubt recommendations that diverge from past practices, seem counter-intuitive, or include a few that are plain wrong. The primary obstacle facing any company trying to implement Price optimization software, according to CFO Magazine’s vendors, and analysts, is the cultural resistance from those at the front lines – salespeople, pricing managers, and department heads. Many of these people feel threatened by software that tries to tell them what to do.
The best way to increase user buy-in is to position Price optimization technology as an enhancement rather than a replacement for individual expertise, according to AMR analyst Langdoc. Instead of “Price Optimization�, it should be looked at as “Price Recommendation�, complementing the experience of people who are using it. Adoption will increase when users are comfortable and sure that they can combine their pricing strategy with recommendations from the software and then deploy prices that are defended by strong analytics.

§ Infrastructure and Data challenges: This requires a retailer to collect and store data (e.g., capturing when an item was on an end-cap), vendor deals and market basket information – all in addition to regular sales transaction data. Shelf price optimization technique such as Khimetrics need at least two years of sales volume and price data. Absence of such data can lead to price image problems. The challenge can easily be handled with technology and process discipline.

§ Linking to the supply chain: According to a study entitled:� Retail out of stocks: A worldwide examination of extent, causes, and consumer responses (Gruen, Corsten, Bhardwaj) revealed that promotional items tend to go out of stock two times more often when compared to non promotional items. Taking this into consideration even the best technology assisted promotion can turn into a damp squib if the supply chain doesn’t have the ability to e

Conclusion

Companies are increasingly recognizing the need to push the top-line results as well as maintain the bottom-line. At the same time they are aware that it would be impossible to achieve this objective with the current price setting approaches. Apart from this, as complexity of business increases the more valuable the software becomes because of its ability to churn POS data into business informations.

While the $1million to $5million price tag for price-optimization is daunting AMR Research expects the price optimization software market to grow 800%, to $900million by 2007. IT Research firm IDC predicts a growth of 12.5% for the price optimization software through 2007�

Still wide adoption of this technology will take some time as early adopters are hesitant to share there benefits due to projects secrecy that shrouds competitive initiatives .
“Pricing solutions are one of the most closely guarded secrets of today's leading companies. This is because pricing software generates an impressive ROI, typically 5 to 19 percent profit improvement.�
- Yankee Group
This is acting as a hindrance for price optimization vendors to expand their customer base as lack of justifiable ROI and too much dependency on theoretical ROI to prove value to retailers.


References
Noha, T., Forrester Research (2004, August 10). Grading Retail Pricing Solutions Forrester Wave: Price Optimization Solutions, Q3 04. Retrieved from http://www.forrester.com/Research/Document/0,7211,34311,00.html

Jason, C., (2004, March). The Price Optimization is Right. Retrieved from
http://www.destinationcrm.com/articles/default.asp?ArticleID=3915

Huang K., (2004, March). Why Leading Companies Are Investing in Price Optimization, Execution and Analysis Solutions. Retrieved from
http://www.metreo.com/pdfs/analyst-yankee-mar2004.pdf

Kay E., Frontline Solutions. Optimize pricing to maximize profits: price management is costly, but well worth the investment- In-depth report: supply chain execution,(Sept.,2003) [Online]. Available

London, S., The New York Times (2003, September). The Real Value in Setting the Price Right. Retrieved from
http://www.nytimes.com/financialtimes/business/FT1059479719730.html?

Nadine, H., Inc. Magazine (2003, July). The Price is Right. Retrieved from
http://www.inc.com/magazine/20030701/25654.html

Sliwa, Carol (2003, January 20). Retailers Explore Price Optimization. Retrieved from
http://www.keepmedia.com/ShowItemDetails.do?item_id=301717&oliID255&bemID=26gTGfAAI9GQFshNdCLL6Aaa8539

Smith, E. G., Nagle, T., T. (Winter 2002). How Much are customers willing to pay? Retrieved from
http://www2.uta.edu/bassler/files/Marketing-strategy%20articles/Pricing%20strategy/How%20Much%20Are%20Customers%20Willing%20to%20Pay.pdf

Businessweek Online (2000, April 10 issue). The Power of Smart Pricing. Retrieved from
http://www.businessweek.com/2000/00_15/b3676133.htm


A. T. Kearney’s services offerings.
http://www.atkearney.com/main.taf?p=3,7,1,2


Synopsis of Ideas published by leading experts on the topic. Price Optimization. Retrieved from
http://leadership.wharton.upenn.edu/digest/man_118a.pdf

Other Readings:

About.com: http://retailindustry.about.com/od/retailpricing/

The McKinsey Quarterly: http://www.mckinseyquarterly.com/category_archive.aspx?L2=16&L3=19

The Professional Pricing Society: http://www.pricingsocitey.com/

Zilliant, Inc. http://www.zilliant.com/solutions.html


About the Author

Anupam Raj Gautam is a consultant with Wipro’s Centre of Excellence (CoE) in Merchandising and Pricing. Anupam’s areas of expertise include In store execution, Merchandise Planning and Pricing. He is a Postgraduate in Management and has about four years of retailing experience.

Aakash Pahwa is a consultant with Wipro Technologies Centre of Excellence (CoE) in Merchandising and Pricing. He has experience in negotiating shelf space with big retailers and store compliance. He holds an MBA with emphasis on retail management.

Analytics in Action

Neeraj Manoria

"The most expensive thing a retailer can do is open a non-performing store".

Retailers have realized that by investing in technology to better develop their customer information, they can outperform their competitors.

Retail IT spending is expected to increase from $22 billion in 2005 to almost $31 billion by 2009, an increase of almost 41 percent, according to AMI Partners. Over the last five or so years, many retailers have invested in their back end, supply chain and distribution operations -- particularly in response to Wal-Mart's growing dominance. Now it is the front end's turn.

The goal of these new initiatives is for companies to gain a better understanding of their customers. For instance, some retailers are turning to their online Web stores to develop new insights about their customer base.Web analytics is not just about trying to drive visitors to the site, but also understanding what people do once they get there.

For instance, many retailers are looking at search terms entered into their Web stores, to better understand what customers care about. Software’s allows retailers to leverage raw customer data to identify customers, monitor their shopping patterns, make merchandising decisions, better focus marketing, and even determine where the next store should be.

Various IT companies in India are focusing their attention to leverage the huge potential in the analytics. Estimates suggest that India could account for one third of the total $17 billion global market by 2007

The availability of skilled manpower is a success factor for India to become a significant player. Analytics offers India a chance to move out of labor arbitrage and migrate to the higher end of the value chain of knowledge activities.

Neeraj

Space Management-A Science

Uday Devdas Menon

A lot of us who are involved with this Blog share a common Platform. We have worked with a company called Symphony Services which is a pioneer in Asia in terms of actively working on projects related to Category Management and Space planning. Space Management as a science is very nascent in India as there are not many retailer who use scientific tools and analytics to allocate category space. It is very advanced and well-rooted into the retail system of Europe and North America. A lot of retailers and CPG Manufacturers have an active tie-up and teams of specialists who are competent in using tools like Galleria's Spaceman, IRI'S Apollo or JDA's Intactix Space Planning Plus for creating Planograms and Floor plans
The primary objective of most retailers is a better Return on Investment and better Return per Square feet utilized. The advantage of Space Management is that if done scientifically, it can take care of the excess inventory issues, Out of Stock issues and ensure proper stock rotation. A small but very well-recieved advantage is also that stores that are scintifically planogrammed are lesser prone to losing customers because of stocks-out. When accurately done, the results are clearly visible to all that SKU level profitablilty goes up and the opportunity cost in terms of space utilization comes down.
India will not take too long to reach a stage where Scientific Assortment Building, Space Planning and high end Analytics becomes an integral part of its retail processes. At the rate at which Retailers are coming into the country, it does not seem a long way off. Already Metro Cash & Carry practices this and even have dedicated professionals on the job. Reilance, with its retail venture has also committed a team to focus on analytics and planning. The road ahead definitely looks sunny for Space Managers in India.

The Indian Retail Phenomena & Wal*Mart's Juggernaut

Balakrishna Parankusam

The Indian customer is a paradox. She wants everything at a discount. Shopper loyalty takes a back seat over price discounts. Novelty seeker is the pseudonym that aptly fits the Indian shopper.

Wal*Mart's lobbyists are burning the midnight oil to ensure that the incumbent Central government opens the doors of FDI in Retail. The bitter South Korean experience of the retail behemoth where it sold all its 16 stores to South Korea's E-mart and that Carrefour which was the first international retailer to exit South Korea, such setbacks will definitely put some breaks on these retailers as they explore global shores. These retailers have failed to read what South Korean housewives want when they go shopping.

But Tesco had a different approach. They were able to "localize" their merchandize in tune with the South Korean customer requirements and they have garnered sustainable customer loyalty.

This clearly indicates that the Wal*Marts of the world will have to localize in their thirst for global dominance. Localization is the weapon that the Indian retailer have used so well that the Indian customer swears by the product offerings and discounts which the retailer provide.

But when Wal*Mart's forays into the Indian Retail scenario, the customer will stand to gain. This will usher in a healthy competition among all the retailers. The customer will get the best quality products at the lowest prices. The various FMCG, apparels and consumer durables products' companies will achieve greater penetration of their products and also witness improved bottom lines, volume wise. Margins of these companies will take a hit with Wal*Mart and Reliance Retail demanding greater markdowns. Reliance asking for 40% margins against the industry average of 25-30% is already creating waves in the vendors' circles.

As the retail industry grows, there will be a tremendous increase of businesses of local companies, manufacturing and selling unbranded products, for example savories, etc.

Last but not the least, the amount of job opportunities will witness a manifold increase. There have been vociferous protests by local traders opposing the opening of the Retail industry, but even they would stand to gain, as they would get products at much lower prices then what the companies are presently offering. These traditional "Pop & Son" stores will witness a minimal reduction in their fortunes as far as customer loyalty is concerned, but these stores have always been the destination for "Top - up" shopping and this is one trend which will never reverse.

The Indian Retail scenario promises to throw up surprises as it evolves, so lets fasten our seat belts and witness the phenomena unfolding in front of our eyes.

The Journey begins...
Balakrishna Parankusam


"Retailog" blog is an initiative from budding young exuberant retailers from India. The objective behind creating this blog is not only to educate ourselves with the phenomena called "Retail" but also seek learnings from across the globe.

Retail in India is evolving and witnessing a consolidation on a minor scale with Industry biggies getting into the gruelling boxing ring of "bottomlines & markdowns". We as the ringside cheerleaders and participants have taken the onus of bringing this bout of "profits and customer delight" to a wider audience. Mentor the nascent talent and learn from the Masters is our mantra.

Retailog is a "log" of Retailing events and learnings and also a culmination of budding retail "logs" (hindi for "people").

Come join us as we get into the cruise control mode of the Great Retail Journey, there would be pauses on the way, but these pauses will be accompanied with getting more Retail fanatics onto the bandwagon.