Key Elements in Realizing the Value of Optimization
By Kathleen Egan, Vice President of Professional Services
Optimization solutions add value for retailers in many ways. First, there is an enormous opportunity optimizing gross margin dollars. Second, there is also value to be gained from operational efficiencies and process automation. Third, there are insights that can fuel fact-based decisions throughout the product lifecycle. Finally, the most important, lasting, and impactful value of optimization may be the way an open, transparent optimization system can help translate your strategy into execution.
As any executive knows, the formulation of a sound strategy is only the first step in driving business results. The challenge often comes in finding a way to translate the strategy from your white board into your merchandising process, into the store, and into your customers’ shopping basket.
An optimization solution, like Revionics Life Cycle Price Optimization, does more than capture the low-hanging fruit from misaligned pricing. It becomes a “control panel” for the execution of pricing and category strategies. Optimization is an efficient frontier that balances the trade-off between sales (units and dollars) and margin. Most retailers want and need to get on that frontier, but it’s difficult to get there without an accurate view of future customer demand. Without science, it is difficult to calculate elasticity, seasonality, and cannibalization effects even at a high level. Getting to a granular level of the hierarchy, where surgical decisions must be made, is all but impossible. Optimization puts retailers squarely on the frontier and in the driving seat for shaping consumer demand.
Once on the frontier, you have to keep pace with the market. New competitors will enter, trends will die and emerge, costs will change, assortments will evolve, and shoppers will react to macro-economic changes (often in hard to predict ways). To keep pace, you need to constantly reevaluate your strategy by category and zone. Crafting the right competitive, margin, traffic, and Private Label strategies is difficult but essential. Executing them while staying on the efficient frontier (between sales and margin) is impossible without a transparent optimization engine.
Transparency allows retailers and their merchandising teams to easily set and assess various components of your strategy so you can evolve it while maximizing profitability. An open engine provides visibility to the impact of multiple drivers so you can evaluate the outcome and successfully keep your strategy on track in a profitable fashion.
Revionics Solution News – Announcing G4.5.1Revionics is pleased to release G4.5.1, which implements customer-requested enhancements that will make your pricing decisions easier and more profitable in Everyday Pricing, Planning, Markdown, Promotions, and Integrated Forecast. Highlights include:
Custom Views Easier to Create
Now you can use the Save As option to quickly create a new custom view using an existing view as the starting point. No longer do you have to build each new view from scratch.
View Effect of Cannibalization
Everyday price recommendations now take into account and display the effect of demand transfer resulting from a price change. See at a glance how a lower price of one item affects sales of all the other items in the same subcategory. This feature can be turned on/off.
Price Family Enhancements
Several changes have been made to make working with price families easier:
- Option to apply a price lock to all price family items without a confirmation prompt.
- Option to export all price family prices if any qualify for export.
- If a price change would violate the minimum price change rules for a majority of the price family items, the suggested price for the family is reverted to the most common original price.
- New price picker dialog to selectively apply price family changes to multiple vendors as desired. This feature applies only if you are configured to break price families by vendor.
Search/Sort in Everyday Scenario Review
New search and sort capabilities in the Everyday price review screen when coming from a planning scenario allow you to effectively drill down and see planned changes in any way you want.
View Rules at All Scenario Levels
Enhancements to the Strategy Configuration screen provide visibility to all the strategies and rules used in your default or a planning scenario. Clickable links then allow you to reset the page to view the specific settings for the selected level.
Simplified Mixed Strategy Setting
The control to define a mixed profit/inventory markdown strategy is more intuitive with a setting of 0.5 being an equal blend of the two strategies.
Promotion Tracking by Sales Type
You can now tag your promotional events, versions, and offers with a Sales Type (corresponding to your merchandising efforts) and the type will be taken into account to provide more accurate forecasts and evaluation, based on your past sales data for that sales type.
Tiered Offers Forecast by Average Price
Previously, tiered promotion offers were forecast based on the lowest tier price only. Now, more accurate forecasts are obtained by calculating and using a weighted average price to forecast tiered offers.
Increased Responsiveness to Product Introductions and Discontinuations
Integrated Forecast looks at new items and discontinued items during the forecast period to better account for assortment planning.
This release strives to provide features and bug fixes that will enhance your use of the Revionics Life Cycle Pricing solution. Please contact your Application Consultant for questions about changes affecting your specific configuration.
Not Your Father’s Category Management
By Jim Sills, Chief Technology Officer, Revionics Inc.
Category Management is undergoing a quiet revolution. Gone are the days when a category manager could trust intuition and experience alone. The new generation is embracing hard data and Retail Science to make better price, promotion, merchandise and assortment decisions. Retail Science applies sophisticated data analysis to help better understand what customers want. Data sources include Point-of-Sale (POS), Transaction Log (TLOG), competitive pricing, syndicated, weather, demographic, and location attributes. Data cleansing, quality assurance testing, and outlier analysis are essential for measuring causal relationships. The result is a demand model that accounts for price elasticity, promotional lift, merchandising, seasonality, cannibalization and affinity. Category managers use this demand model to evaluate and compare scenarios. For example, a supplier may offer an incentive to promote Cheerios. The category manager can evaluate the category profit accounting for the vendor incentive, cannibalization, and affinity. This analysis shows how cannibalization of private label erodes category margin. Even the impact on loyalty customers can be evaluated in terms of basket size and trip frequency by customer segment.
Other examples where category managers are leveraging Retail Science include:
Store-Zone Clustering. Any given item may be priced too high in one store and too low in another. Store-Zone Clustering identifies the optimal price zones based on proximity to competitors, population density, household income, median age, and other factors that influence customer behavior and sensitivity to price. Store-Zone Clustering has been shown to improve profit by 1% of sales (even higher profits have been realized by some retailers and this benefit is above and beyond that from price optimization alone). The principal components driving a store into one cluster versus another are evident from this analysis. For example, Zone 1 may be characterized by a highly price sensitive, middle-income, densely populated, customer base with a given ethnicity ratio and strong competition from Walmart within 2.5 miles. The strength of each of these factors in driving a store into a given price zone is evident from the analysis.
KVI Items. Key Value Items (KVI) have the greatest influence on customer price perception and represent an important segment of a retailer’s business. Frequently, just 10% of a retailer’s items account for 90% or more of customer price perception and have the greatest influence on traffic. These items can come from many different categories and there can be multiple groupings. Common KVIs include, for example, highly sensitive items, competitive items, traffic drivers, and basket builders. Retail Science can be applied to identify the top KVI items by looking at item profit and sales along with price elasticity, market-basket analytics, and syndicated data. Understanding which items are the “true KVIs” and positioning them aggressively yields the most return while allowing the freedom to price non-KVI items in line with margin targets.Pricing. Price elasticity is a measure of customer price sensitivity and relates how unit movement will respond to a change in price as indicated in the table below.
1.0 -10% +10%
2.0 -10% +20%
0.5 +10% -5%
Retailers can raise sales by increasing the price on items with low price elasticity and decreasing the price on items with high elasticity. Some category managers find it counter intuitive that a price reduction on some sensitive items can increase both profit and revenue even at a lower margin. The first step toward optimal pricing is to identify the category role and strategy. For example, some categories are identified as Convenience, Traffic Drivers, Margin Enhancer, and Turf Protector in AC Nielson's publication, Consumer-Centric Category Management.
Willard Bishop is especially strong in working with retailers to identify how best to define category roles and map those roles into strategies that can leverage Retail Science. These strategies and the science account for Private Label to National Brand Gaps, Good-Better-Best relationships, Ending Numbers, Price Change Frequency, Minimum/Maximum Price Change rules, Price-Per-Unit relationships, Margin Targets, and Competitive Price Indexes. Competitive prices can be collected or purchased from Rival Watch.
Promotion. Promoting the wrong product or the wrong offer erodes category profitability. Retail Science can be used to recommend the best items to promote and at what offers. During the planning stage a category manager can use the Demand Model to evaluate “what if” scenarios. For example, which is the best item to promote on the front page in a major feature? What is the impact of merchandising the item in an end cap or a display. Is BOGO better than 10 for $10? In all of these comparisons, the Retail Science accounts for supplier funds, cannibalization, and affinity.
Category managers are now using Retail Science to segment loyalty customers and identify the best one-to-one offers that will drive basket profit and trip frequency. Market Basket Analysis is applied to identify item-level affinity and understand how much a promotion on meat will drive sales in produce.
Retail Science benefits category managers best when it is embedded in tools that support Supplier Collaboration and Ad Planning, including pre-press layout and integration to publication tools such as Adobe InDesign or Quark.
Markdown. Simple clearance strategies such as 25%, 50%, and 75% markdowns spread across three months leave money on the table. Too often items are marked down when demand is sufficient to clear inventory. Similarly, there are items with large inventory that require deeper or earlier markdown to maximize profit. Retail Science identifies the best markdown amounts and dates. Category managers can specify strategy objectives, such as to clear inventory or maximize profit. Coherence rules can be applied to simplify signage and shelf tags.
Merchandise & Assortment. Category managers are constantly evaluating their assortment. Retail Science can be applied to understand how an assortment change will impact a category’s profitability. Some categories are highly cannibalized and the assortment can be rationalized. Others have important affinity relationships. When planning a category reset or a strategy change, Retail Science is used to evaluate the best combination of assortment and prices. Merchandising and price are also interdependent. Suppose that demand is high for a particular item; so high that the retailer often has a hole in the shelf. Is it better to increase the price, or to add facings on the end-cap? Retail Science can be used to evaluate the alternatives and make the best decision.
At Revionics we recognize the power of Retail Science and how it can be leveraged by category managers. We offer a combination of Analytical Services and Software-as-a-Service (SaaS) Product Applications that category managers are using to raise profit and sales.
Refresh or Remodel: How to Stay Relevant in Tough Times
By Paul Weitzel, Managing Partner, Willard Bishop
Relevancy means everything in today’s very difficult retail environment. Relevant prices, relevant ads and displays, relevant assortment, and a relevant shopping experience are all key to winning shoppers and shopping trips. Has relevancy really changed that much during these difficult times? Many grocers will tell you that they have been caught off guard by how fast relevancy has shifted over the past two years.
The cost of keeping stores relevant has accelerated and is putting time and financial pressures on retailers to rethink how they will keep up with current shopper needs and shifts in shopping behaviors. This month’s Competitive Edge takes a look at how retailers can spend less to maintain relevancy while reacting faster to changing times.
Why Is Relevancy So Important?According to Wikipedia, relevance or relevant is “a word used to describe how pertinent, connected, or applicable something is to a given matter.” As we think about grocery stores, relevancy is everything. The more a store is relevant, the more connected shoppers are to that store and the less likely they are going to shop somewhere else.
In today’s competitive and challenging retail environment, it’s very important to know how truly connected a consumer is to a particular store or banner. Today’s consumers have more choices on where to shop for their weekly grocery products than ever before. There are more alternative outlets selling grocery products (visit our website for the latest report on the Future of Food Retailing), we have more square footage than ever and we have to drive shorter distances to get our groceries. More choices mean more competition for share of wallet.
Retailers are finding loyalty can be a fickle thing and they have to work twice as hard today to connect with shoppers and maintain their business. That is one of the reasons why we are seeing a large increase in the number of shopper gateways and shopper marketing programs. Companies like dunnhumby, EYC, and LMG are developing very sophisticated shopper marketing programs for some of the big chains who see the need to significantly upgrade their ability to truly connect with important shoppers and households.
Top 10 Ways to Be RelevantWhile there are many things retailers can do to be more relevant, here is a list of the top ten ways I think retailers can be more relevant to their shopper base.
- Ensure every endcap communicates a strong price image, consistent with the overall store pricing strategy. Too often, ends are sold to the highest bidder or are used on discounted product with a TPR (temporary price reduction) that is still higher than the competitor’s everyday price across the street. Every inch of endcap space must count and it needs to be used to send a clear and compelling price image. If it isn’t used this way, this valuable real estate is wasted.
- Reduce shelf clutter. Many stores now average 7,000 temporary price reductions a week. This is double the number compared to an average week in 1990. Some aisles have so many tags that it’s getting harder and harder to see product on the shelf. Shoppers get turned off when stores make it hard for them to find the items that they want.
- Apply SKU Rat, but adjust rules on a category-by-category basis. Store-wide SKU Rat programs are being implemented today with consistent variety reductions across the board (15% cuts). Early results are in and confirm that straight, deep cuts across the store are just too much, and too fast for shoppers to accept. Customer complaints are up and some retailers are racing back into the stores to add variety back to many categories that were cut. The concept is sound but the execution is flawed. SKU Rat should always be done on a category-by-category basis.
- Build more efficient and easier to shop stores. All of the store optimization work we’ve done over the years suggests the optimal store footprint is around 40,000 square feet. This size store produces the best ROII. With the aging of America (older people don’t like to shop big stores), the high cost to run big stores, and the growing list of outlets consumers are willing to shop at, stores can become more efficient and more relevant in less space.
- Improved speed-to-shelf for new items. As a whole, our industry has done a better job in recent years of getting new items on the shelf. What once took six to eight weeks, is now consistently done in under two weeks. For many categories, new items represent 100% of the growth. If you are the last in the market to get new items on the shelf, you run the risk of missing most of the category growth. This opportunity, however, needs to be balanced with the cost of resets.
Operations View: Revionics Release Planning and Testing Process
By Tom Martineau, Revionics CIO
Our customers often ask us about the process and timing of releasing new features into our Life Cycle Pricing solutions. The Revionics Operations team, which includes Customer Support, Solutions Engineering, and DBAs, owns responsibility to test and launch all new features prior to customer release. This article is designed to provide an insider’s view of release planning from an Operations perspective.
Revionics has an established development and release process that allows for major product enhancements and new module releases to occur on a scheduled basis. This process also allows for Revionics to release smaller interim updates that are minor, maintenance in nature, or that respond quickly to a critical issue.
Revionics releases enhancements to our solutions quarterly, with all customers on the same release schedule in accordance with our Software-as-a-Service model. Additionally, Revionics will also introduce non-disruptive maintenance releases to address any interim product requirements or customer support cases.
The orchestration of the Revionics release schedule requires months of planning, development, and testing. We begin release planning by bundling customer feature requests and product enhancements. This bundle is reviewed by various committees and assigned a release number. Once designs are completed, coding begins and Operations prepares for testing. Testing includes complete unit, regression, and performance testing.
Additional release testing continues in the Revionics Staging environment. Staging replicates our customer environments, so that it properly tests performance and customer data within the new code. The Operations team then performs a battery of test scripts to verify the new and existing functionality within each module. As the tests are completed, any task that fails is sent back to Development for correction. This cycle is repeated until the test scripts can be completed in their entirety. As with any testing and Quality Assurance process, the scripts are constantly revised to provide a thorough test. The testing process is comprehensive for each release and is typically completed in four weeks.
Revionics release testing is very thorough, however there are times when issues are not identified. With the diversity of our customers and the individuality of their environments, not every conceivable chain of user action can be anticipated and tested. It is our commitment to our customers that we will continually strive to improve our release processes to minimize any customer impact.
Customers will be notified of product releases two weeks in advance. These email-based alerts will include a list of the planned enhancements and notice of any network disruptions. Often our releases are scheduled overnight and will not disrupt production. Customer Support is familiar with all features of the new product based on their testing experience, and can quickly answer questions and troubleshoot as necessary. If you have any questions, I am available at email@example.com.