Pricing 2015: Learning To Live In A Dynamic, Promotional World · According to this year's benchmark, retailers have figured out how to use pricing and promotions to drive sales,

Pricing 2015: Learning To Live In A Dynamic, Promotional World

Benchmark Report 2015

Nikki Baird and Paula Rosenblum, Managing Partners

June 2015

Sponsored by:

Supported by:

Executive Summary

According to this year's benchmark, retailers have figured out how to use pricing and promotions to drive sales, but are not so good at using them to make profits. The best-performing retailers believe they have solid promotion planning processes, and they see their promotions' effectiveness in line with those beliefs. Retailers whose sales are lagging are even more likely to believe their promotions are effective, even though they don't regularly identify bad promotions, and they don't regularly measure the full impact of a promotion. Pile on the need to understand and respond to competitors' dynamic pricing strategies – multiple, intra-day price changes – and retailers face as much disruption when it comes to pricing as they did when price optimization was first introduced.

How does this translate into the future of pricing? It is a muddled future, indeed.

Key Findings • Retail respondents report that consumer price sensitivity remains top of mind, but with

increased focus on pricing aggressiveness and price transparency. We examine how retailers are reacting to these issues in the Business Challenges section of this report, beginning on page 6.

• Retailers need to improve margins and they see profitable promotions playing a significant role there. Alongside promotions, retailers increasingly see an opportunity for dynamic pricing. However, while they resolve to match competitors' prices as a result of price transparency and competitive price intelligence, when actually confronted with shoppers and mobile phones in stores, retailers' responses fall short. Learn more in Opportunities (page 10).

• The evolution of retail pricing has been technology-driven for the last fifteen years, but that time may be coming to a close. It's not that the technology has stopped evolving. It's that retailers have finally developed enough maturity with how the technology is used to be able to start building an effective process and organization around it. See how that has shifted retailers' perceptions of how to prepare internally in the Organizational Inhibitors section, page 14.

• Just as dynamic pricing has played a strong role in shaping retailers' perceived opportunities, it has also played a role in driving technology investments. While retail respondents say they see the most opportunity in evolving their base price capabilities, their planned technology investments tell a different tale. Learn more in the Technology Enablers section, beginning on page 19.

Even though price tools and processes have been around long enough to be considered "mature," retailers still face a tremendous amount of disruption and uncertainty. Our suggestions for how retailers can navigate this uncertainty can be found in the Bootstrap Recommendations portion of the report.

We certainly hope you enjoy it,

Nikki Baird and Paula Rosenblum RSR Research

ii

Table of Contents Executive Summary ......................................................................................................................... i Research Overview ......................................................................................................................... 1

Mixed Emotions And Mixed Messages ........................................................................................ 1 A Good Holiday Season! ............................................................................................................. 1 Results In Line With Pricing Objectives ....................................................................................... 2 The Volume Of Price Changes Continues To Soar ..................................................................... 2 Retail Winners Flying With Clarity, Laggards Flying Blind ........................................................... 3 Methodology ................................................................................................................................ 4 Survey Respondent Characteristics ............................................................................................ 4

Business Challenges ....................................................................................................................... 6 What Have We Wrought? ............................................................................................................ 6 Europe And The UK Follow In Dangerous Footsteps .................................................................. 7 A Fair-To-Middling Self Evaluation .............................................................................................. 7 Price Transparency And Channel Proliferation Create Disruption ............................................... 9

Opportunities ................................................................................................................................. 10 Localization Takes A Back Seat To Promotions And Value Proposition ................................... 10 Retail Winners See Different Opportunities ............................................................................... 11 A Disconnect Between Strategies And Tactics On Price Comparisons .................................... 11 Competitive Price Intelligence: Are Opportunities Missed? ....................................................... 12

Organizational Inhibitors ................................................................................................................ 14 What Is The Impact? .................................................................................................................. 14 The Consumer Looms Larger And Larger ................................................................................. 15 Overcoming Inhibitors ................................................................................................................ 16 Learning From Differences ........................................................................................................ 17

Technology Enablers ..................................................................................................................... 19 Back To Basics .......................................................................................................................... 19 Moving To The Digital Front ...................................................................................................... 21

BOOTstrap Recommendations ..................................................................................................... 23 The Jury Is Still Out ................................................................................................................... 23 Focus On The Process, But Keep The Customer In Mind ......................................................... 23 Accelerate Efforts To Measure Promotion Effectiveness .......................................................... 23 Make Sure Your Competitive Price Policies Are Consistent ...................................................... 24 Monitor Dynamic Pricing Behavior – Don't Be Afraid To Experiment ........................................ 24

Appendix A: RSR’s Research Methodology .................................................................................... 1 Appendix B: About Our Sponsors ................................................................................................... 2 Appendix C: About RSR Research ................................................................................................. 3

iii

Figures Figure 1: Good Improvement In Holiday Season Gross Margin ...................................................... 1

Figure 2: Objectives: Improve Margin And Convey A Value Proposition ........................................ 2

Figure 3: The Number Of Price Changes Skyrocket Again ............................................................. 3

Figure 4: Winners Get The Processes, Laggards Shooting Blind ................................................... 4

Figure 5: Consumers And Competitors Drive The Agenda ............................................................. 6

Figure 6: US More Focused On Consumers, EU On Competitors .................................................. 7

Figure 7: Self Evaluations: Overall Mixed Signals ........................................................................... 8

Figure 8: Dramatic Differences Depending On Products Sold ........................................................ 8

Figure 9: Mixed Responses To Channel Proliferation ..................................................................... 9

Figure 10: Focused On Pulling The Price Lever For Everyone ..................................................... 10

Figure 11: Winners Laser Focused On Margin, Moving Towards Localization ............................. 11

Figure 12: In General, Get As Close As You Can ......................................................................... 12

Figure 13: A Split Between Slow And Rapid Response To Price Intelligence .............................. 13

Figure 14: Potential Price Decisions Grow More Challenging ....................................................... 14

Figure 15: Growing Dangers ......................................................................................................... 15

Figure 16: The Long, Hard Road vs. The Quick And Easy Solution ............................................. 16

Figure 17: Learning To Walk ......................................................................................................... 17

Figure 18: The Basics Need A Boost ............................................................................................ 19

Figure 19: The Digital Frontier ....................................................................................................... 20

Figure 20: Online Pricing's Impact ................................................................................................. 21

Figure 21: An Industry Divided ...................................................................................................... 22

1

Research Overview

Mixed Emotions And Mixed Messages Every year, RSR surveys retailers on their pricing strategies and tactics, and 2015 is no exception. One important finding is worthy to note: we found more inconsistencies in retailer perceptions this year than in prior years. On the plus side, retailers seem to have figured out how to eke out gross margin dollars in a hyper-promotional world. Yet they continue to give themselves fair-to-middling grades in executing their pricing strategies, and they believe they are leaving money on the table.

Unfortunately they don’t have the analytics in hand to truly identify where suspected profit leaks actually occur. These analytics are available in the market, and in general, retailers actually do have the data to fuel them. They just haven’t gotten them in place yet. If they have, they’ve already become dated, and retailers are looking to replace what they bought in the last decade.

Retailers are doing better in this new world, even in the face of continued downward pricing pressures, supply chain hiccups (the West Coast dockworkers’ strike in the US, for example), and fickle consumer buying habits. As we’ll see in a moment, the holiday season was, in general, a selling gross margin success. But that’s only part of the story.

Other questions remain to be answered about bottom-line profitability, but those questions are mostly outside the scope of this study. We especially wonder if retailers are making up in gross margin dollars the money spent on payroll and other costs associated with continually changing prices. If they are, we’d expect to see earnings upticks beyond what have been brought into the public domain.

Quite simply, we haven’t seen it. We’ll come back to this subject again and again, but for now, it’s time to take a look at what retailers report and what we learned from this year’s survey.

A Good Holiday Season! Clearly our retail respondents did something right during the all-important holiday season. The percentage of retailers reporting an increase in selling gross margin rose by 62%: from 29% to 46%. Those are pretty strong results and clearly outstrip the prior two years (Figure 1).

Figure 1: Good Improvement In Hol iday Season Gross Margin

Source: RSR Research, June 2015

46% 43%

11%

29%

54%

17% 26%

50%

24%

Margin improved Margin stayed the same Margin declined

Changes In Year Over Year Holiday Season Gross Margin

2015 2014 2013

2

Still, our respondents remain ambivalent about their effectiveness.

Results In Line With Pricing Objectives Since retailers most frequently cite maximizing gross margin as one of the top three objectives for their pricing strategy (Figure 2), the holiday season results are good news indeed.

Figure 2: Object ives: Improve Margin And Convey A Value Proposit ion


Fewer retailers are determined to use price as a lever to build market share (even though they do see it as a demand driver). Instead, they most frequently cite improving merchandise sell-through (or turn), highlighting their price perception and conveying their value proposition.

It’s honest and interesting to see that hardly any retailers believe price is not a primary driver for them. Whether high- or low-priced value perception, price matters.

The Volume Of Price Changes Continues To Soar Last year, we grew hopeful that the number of price changes sent to stores and other channels was starting to level out. This year’s results dash those hopes into the ground (Figure 3, below).

The explosion of web-based dynamic pricing is contributing to this increase, but no doubt a high volume is going to stores. We continue to ponder bottom-line profitability and overall impact on those stores. In an age when customers expect better service, we have to wonder about the usefulness of personnel constantly changing signage on racks, shelves and end-caps.

20%

26%

29%

43%

N/A

23%

40%

37%

46%

5%

28%

29%

30%

36%

38%

39%

46%

49%

Price is not our primary driver

To create excitement for our brand

To stave off competitive pressures

To build market share

To create a strong price perception in the market

To improve merchandise sell-through

To drive demand

To convey our value proposition

To maximize gross margin

Top Three Objectives Of Corporate Pricing Strategy

2015 2014

3

Figure 3: The Number Of Pr ice Changes Skyrocket Again


When we look at the above data by region (not pictured), the United States still leads the pack in changing prices, with 42% of respondents reporting a significant increase in price change volume vs. only 21% of retailers from Europe and the United Kingdom. We have seen a small uptick in those countries as well, however, with 51% reporting the number of price changes as “somewhat increased” vs. only 41% in 2014. Put simply: promotional frenzies are contagious.

Retail Winners Flying With Clarity, Laggards Flying Blind RSR’s research always focuses on a category of retailers we call “Retail Winners”. Our definition of Retail Winners is simple. We judge retailers by year-over-year comparable store/channel sales improvements. Assuming industry average comparable store/channel sales growth of 4.5 percent, we define those with sales above this hurdle as “Winners,” those at this sales growth rate as “average,” and those below this sales growth rate as “laggards” or “also-rans.”

Focusing on Winners’ perception is always interesting. It turns out that Winners don’t merely do the same things better. They think differently. They plan differently. They respond differently. They tend to think about process rather than the end game. In the case of pricing practices, they do the same things better and with more forethought.

To illustrate this point, let’s take a look at Winners perceptions around promotions (Figure 4, below).

36% 39%

21%

5%

21%

34% 42%

3%

41% 35%

21%

3%

Increased significantly

Somewhat increased

Stayed about the same

Decreased

How Has The Number Of Price Changes Changed In The Past Three Years?

2015 2014 2013

4

Figure 4: Winners Get The Processes, Laggards Shoot ing Bl ind


This data is nothing short of mind-boggling. Winners report they have better promotional planning processes and stronger capabilities to identify promotional impacts (both good and bad), yet Laggards far more frequently believe their promotions are effective.

This is hard to understand across many levels:

• How can promotions be effective if the overall top-line lags? • How do laggards actually know the promotions are effective in the first place?

On the flip side, it’s really interesting to see only half of Retail Winners reporting their promotions are effective. This speaks to the mixed emotions we described at the beginning of the study, and also highlights the potentially toxic impact of promotions on retailers’ bottom lines. It also shows the thoughtful side of Retail Winners. They may decide to embark on a path, even as they recognize it’s not necessarily good for the end-game. But at least they know.

Methodology RSR uses its own model, called the BOOT©, to analyze Retail Industry issues. We build this model with our survey instruments. Appendix A contains a full explanation of the methodology.

The BOOT Methodology© helps us better understand the behavioral and technological differences that drive sustainable sales improvements and successful execution of brand vision.

Survey Respondent Characteristics RSR conducted an online survey from March-May 2015 and received answers from 123 qualified retail respondents. Respondent demographics are as follows:

71%

14%

21%

57%

54%

54%

59%

68%

My company's promotions are effective

We regularly measure the full impact of a promotion: both cannibalization and halo

effects

We regularly identify and eliminate "bad" or ineffective promotions

We have processes in place to manage promotional planning across organizations

Opinions on Promotions: Winners vs. Laggards

Retail Winners Laggards

5

• Job Title: Senior Management (CEO, CFO, COO) 21% Vice President & Vice President 37% Individual Contributors 30% Consultants 12%

• 2014 Revenue (US$ Equivalent) Less than $50 Million 13% $50 - $249 Million 6% $250 - $499 Million 15% $500-$999 Million 15% $1 - $5 Billion 33% Over $5 Billion 19%

• Products sold:

Fashion / Short Lifecycle 21% Seasonal 13% Basics/Replenishment Goods 21% Perishables 16% Hard goods (non-durable) 4% Consumer electronics 7% Durable Goods 6% Other (hospitality, etc.) 13%

• Retail Headquarters/Retail Presence : Corp HQ Presence

USA 57% 63% Canada 1% 32% Latin America 1% 18% UK 26% 43% Europe 7% 34% Middle East 3% 17% Africa 0% 4% Asia/Pacific 5% 20%

• Year-Over-Year Sales Growth Rates (assume average growth of 4.5%):

Better than average (Winners) 41% Average 43% Worse than average 16%

6

Business Challenges

What Have We Wrought? Overarching business challenges show the consequences of retailer actions in the past few years. The perception of consumer price sensitivity remains essentially unchanged, but we can see concerns over the competitive environment continuing to escalate (Figure 5).

Figure 5: Consumers And Competitors Drive The Agenda


Retailers now feel almost as much pressure from competitors as they do from consumers. Price transparency is still increasing, with the number of respondents citing this as a top-three business challenge doubling from last year.

Ironically, almost a third of retailers believe consumers perceive them as “not price competitive enough.” It’s unclear what these retailers can possibly do to change that perception. How many price changes will it take to make them feel better about their position?

Not surprisingly, given the constant hammering from Walmart in the US and other retailers like Tesco in the UK, retailers selling fast-moving consumer goods (FMCG) are most stressed by competitor pricing practices. Sixty-eight percent select this as a top-three challenge, vs. only 38% of retailers selling General Merchandise, Apparel (GMA) and even durable goods.

25%

22%

16%

N/A

42%

27%

24%

32%

56%

7%

10%

29%

31%

37%

37%

47%

48%

55%

Shareholder demands for price as a way to achieve a better return on inventory

Consumer demand for personalized or localized prices

Competition coming from unexpected places

Consumer perception that we are not price competitive

Consumer demand for cross-channel price consistency

Increased competitor promotional intensity

Increased price transparency

Increased pricing aggressiveness from competitors

Increased price sensitivity of consumers

Top Three Strategic Pricing Business Challenges

2015 2014

7

Europe And The UK Follow In Dangerous Footsteps We found significant business challenge differences between the US and UK/EU, with the US more fixated on the consumer, and the UK and EU far more likely to fixate on the competition (Figure 6).

Figure 6: US More Focused On Consumers, EU On Competitors


As a general rule, the U.S. is a bit more mature in the world of cross-channel retailing. As such, US retailers are less likely to cite consumer demand for price consistency across channels as a top-three issue. They’ve worked out this problem. Channel-specific promotions are a winning behavior but base price must be consistent across all selling channels. The US is also far more fixated on price transparency and consumer price sensitivity – which speaks to its more promotional environment.

If European and UK retailers continue following in the US’s hyper-promotional footsteps, they can expect to see consumer-driven business challenges rise as well. US-based retailers believe that consumers have trained them, but this data is a telling statement that shows quite the opposite is true.

A Fair-To-Middling Self Evaluation When it comes to pricing effectiveness, our respondents give themselves somewhat better grades than they did last year, when only 27% reported their pricing practices were very effective in driving top- and bottom-line results. This year, with more granular questions, we received more positive answers (Figure 7, below).

Still, we can’t call this a resounding endorsement. Retailers remain challenged. And as we observed earlier, retailers are most lukewarm about their ability to drive those top-line improvements to the bottom-line. Price changes come at a cost. Retailers apparently believe they have enormous headroom to drive better results in building top-line revenue, loyalty (although we remain perplexed by the perception that low price drives loyalty in almost any circumstances), and most important, those elusive bottom-line results.

50%

42%

24%

63%

34%

39%

30%

34%

36%

38%

53%

64%

Consumer demand for price consistency across channels

Increased promotional intensity of competitors

Consumer perception that we are not price competitive

Increased pricing aggressiveness from competitors

Increased price transparency

Increased consumer price sensitivity

Selected Business Challenges: US vs. UK/EU

USA UK/EU

8

Figure 7: Self Evaluat ions: Overal l Mixed Signals


Interesting differences emerge depending on product sold. Let’s take a look at two areas: Effectiveness at driving bottom-line results and effectiveness in driving revenue from “best” customer segments. The differences are somewhat staggering (Figure 8).

Figure 8: Dramatic Differences Depending On Products Sold


32%

40%

45%

47%

64%

54%

45%

50%

5%

7%

10%

4%

Driving bottom line results

Driving revenue from our best customer segments

Building loyalty with our customers

Driving top line results

Effectiveness Of Pricing Strategies In Various Situations

Very effective Somewhat effective Not effective at all

50% 46%

27% 24%

18%

41% 54%

68% 71%

76%

9% 0%

5% 6% 6%

Fashion/ short lifecycle Seasonal

Basic/replenishment Perishables

Durable & Hard Goods

Effectiveness of Pricing Strategies in Driving Bottom Line Results


59% 46%

38% 29%

18%

32% 54%

57% 65%

65%

9% 0%

5% 6%

18%

Fashion/ short lifecycle Seasonal

Basic/replenishment Perishables

Durable & Hard Goods

Effectiveness of Pricing Strategies in Driving Revenue From Our Best Customer Segments


9

Fashion / short lifecycle retailers are performing better in both areas, while retailers selling durable and hard goods fare the worst. Retailers selling perishables and basics self-evaluate marginally better.

Price Transparency And Channel Proliferation Create Disruption Responses to price transparency caused by channel proliferation continue to be scattered, with a large - but shrinking - plurality of respondents reporting “no impact" on their strategy (Figure 9).

Figure 9: Mixed Responses To Channel Prol i ferat ion


The first time we asked this question was in 2011. In general, very little has changed since then. The only area we’ve seen consistent yet slow growth is in the number of retailers returning to one price across all channels. In 2011, only 10% of respondents were taking this tack. This year we’ve seen it rise to 17%.

This number is primarily driven by retailers selling basic and replenishable items, with 33% reporting they’ve returned to one price, vs. 23% of fashion retailers and NO retailers selling consumer electronics and durable goods. Retailers selling those products are far more apt to competitive price match, with 29% reporting they’ve moved to that strategy. This is the Amazon effect in action.

We fully expect the number of companies impacted by channel proliferation to continue increasing as a business challenge, along with the challenge of getting better bottom-line results.

With these challenges serving as the backdrop, let’s now find out where retailers perceive potential pricing opportunities.

43%

15%

9%

11%

N/A

12%

38%

5%

10%

12%

15%

17%

No impact

Channel specific promotions

Web as lowest price

Channel-specific pricing (web-only or store-only)

Increased competitive price matching

Returned to one price across all channels

How Channel Proliferation Has Impacted Pricing Strategy

2015 2014

10

Opportunities

Localization Takes A Back Seat To Promotions And Value Proposition The industry trade press is replete with references to retailers moving to localized pricing. Even RSR has talked about presenting “Your Price” rather than “The Price” as the next wave of pricing strategy.

It turns out “the industry” is way ahead of retailers themselves. Retailers have far more straightforward goals, and as we can see in Figure 10, hardly any of them are thinking about localized pricing – they’re thinking about their brand image, gross margin, and managing their lives in a world of competitive promotions.

Figure 10: Focused On Pul l ing The Pr ice Lever For Everyone


Perhaps most interesting is the somewhat meteoric rise of dynamic pricing: while solely used in the world of eCommerce, its value has been recognized by close to three times as many retailers as in last year’s survey.

We were also somewhat surprised to see another newly added answer choice, “creating a better value proposition”, embraced as a top-three opportunity by a third of respondents.

To help wrap our heads around these responses, we took a look at differences between Retail Winners and laggards. The data started to form more coherent patterns once we did.

NA

34%

9%

29%

NA

40%

38%

23%

54%

17%

23%

24%

28%

29%

32%

33%

35%

36%

44%

Provide more localized offerings to customers

Provide a more seamless cross-channel experience

Improve margin through dynamic pricing

Increase market share for key categories

Better matching of demand and supply

Create a better value proposition

Improve top-line sales

Create a more price competitive image

Create more profitable promotions

Improve margins

Top Three Opportunities for Pricing to Contribute to Business Strategy

2015 2014

11

Retail Winners See Different Opportunities Retailer Winners are extremely focused on the opportunity to improve margins. This makes sense in many contexts. At the most basic level, per our definition of Retail Winners, they’ve got their top lines working nicely. The next hurdle is becoming ever more profitable. As we can see in Figure 11, they are thinking about this a lot more than their underperforming competitors.

Figure 11: Winners Laser Focused On Margin, Moving Towards Local izat ion


Even though the number of retailers seeing localized offerings as a top-three opportunity is very low overall, it turns out that most of those who DO see them as such are Winners. We’re not ready to call this a ringing endorsement, but will observe how this plays out in the year ahead – is it an up-and-coming trend, or is it a red herring? Only time will tell. Winners have the luxury of trying new things. We’ll see if they carry it forward.

Laggards, on the other hand, have very different concerns. Their top lines are not under control. They apparently believe that improving their value propositions and creating more profitable promotions will help solve their top-line problems.

However, as we noted in the overview, 71% of that population believes its promotions are already effective. Apparently, Laggards believe that they’ve learned how to run effective, but not-so-profitable promotions that don’t drive top-line results. It’s always our hope that calling out these sorts of inconsistencies will serve to show those retailers the illogic of their positions. There’s no other way to change, really.

A Disconnect Between Strategies And Tactics On Price Comparisons In the Business Challenges section of this report, we highlighted retailers’ varied strategic responses to channel proliferation. Almost half of respondents reported their strategies have not changed at all. That seems to fall apart just a bit when they are actually confronted by shoppers using mobile price comparisons in their stores (Figure 12).

7%

21%

43%

50%

43%

21%

16%

27%

30%

32%

35%

43%

Provide more localized offerings to customers

Better matching of demand and supply

Improve top-line sales

Create a better value proposition

Create more profitable promotions

Improve margins

Selected Diffrences: Opportunities For Pricing To Contribute To Business Strategy


12

Figure 12: In General , Get As Close As You Can


Fewer than 20% of respondents price match, and that response is driven by those selling durable goods and consumer electronics (36%). This is not surprising – with the exception of high-end Apple products, the space remains incredibly price competitive.

What is a bit more interesting is that those who “haven’t seen it yet” are predominantly retailers selling perishables. Forty-two percent cited this as their response. Perhaps as more Walmart and Target Supercenters proliferate across the landscape, they will, in fact, start to see it. It’s actually rather hard to believe that they’ve missed it so far.

Competitive Price Intelligence: Are Opportunities Missed? “Competitive price intelligence” has been around for all of retail’s history. Whether it involves just sending employees into competitors’ stores or gathering the data via competitive price intelligence engines, they want to know what competitors are doing.

Somewhat surprisingly, almost a third of respondents (31%) still gather their competitive price data manually. Another 41% are using an in-house solution to gather and process this data. This is equally surprising – as we pointed out in last year’s study, with the backlog of IT development and maintenance requests consistently reported by retailers, we would think they’d opt for an outsourced solution.

However, when we take a look at how retailers are actually using the data they gather, we can see a disconcerting lack of urgency.

While a large plurality of respondents cite dynamically adjusting to competitor price changes as a top-three use of Price Intelligence, most other frequent uses are not nearly so time-sensitive (Figure 13).

8% 19%

41%

10% 3%

20% 16% 16%

43%

N/A 8%

18%

Ignore it Match it Be "competitive"

Change the game by offering

an alternative reward

Beat it We haven't seen it yet

Policy for Respnding To Customers Using Mobile Price Comparisons

2015 2014

13

Figure 13: A Spl i t Between Slow And Rapid Response To Pr ice Intel l igence


We can only call this an opportunity missed, and we continue to wonder. Given that retailers are steadily increasing the number of price changes they send to stores and other channels, and given the concerns retailers have over consumer price sensitivity and competitor encroachment on their territory, married with the fair-to-middling grades they give themselves on pricing effectiveness, why wouldn’t more retailers get more near-real-time about competitor price comparisons?

With so many opportunities - but such a significant number of them being missed - it’s time to take a look within the enterprise to see what keeps retailers from executing.

23%

25%

34%

39%

40%

41%

46%

53%

For weekly reviews of competitors' prices in key categories online

As an input to price planning at a store cluster level

For a seasonal review of assortment overlap with competitors

For monthly or quarterly reviews of competitors' prices on key items

As an input to price optimization

For monthly or quarterly reviews of competitors' prices in key categories

To dynamically adjust to competitor price changes

For weekly reviews of competitors' prices on key items

Top Three Uses Of Price Intelligence

14

Organizational Inhibitors

What Is The Impact? Keeping up with competitors' prices continues to dominate survey takers' top internal challenges in 2015, but other concerns are shifting, particularly around understanding the impact of pricing decisions (Figure 14).

Figure 14: Potent ial Pr ice Decis ions Grow More Chal lenging


Forecasting the impact of potential pricing decisions and making sure that stores change their prices accurately and timely have both increased in importance to retail survey respondents. Forecasting future impact jumped significantly – 25% cited it as a top-3 challenge last year and 42% say it is an internal obstacle this year. In 2014, 26% of retail respondents reported that making sure stores change prices accurately and timely was a top-3 challenge vs. 34% in 2015.

Other notable differences:

• While both high- and low-performing retailers cite forecasting the impact of pricing differences as a significant challenge, it is clearly the laggards who are driving this response: 63% of laggards cite this as a top-3 challenge vs. 41% of Retail Winners

• Keeping up with competitors' prices is apparently more challenging to European retailers: 61% of UK/EU respondents reported this as top-3 vs. 42% of US respondents

• Minimizing markdown spend was also more of a challenge to European respondents – 37% UK/EU respondents reported this as a top-3 challenge vs. 28% of US respondents

20%

24%

24%

25%

26%

29%

31%

34%

42%

48%

Keeping up with pricing and packaging changes by manufacturers

Keeping up with promotional deals made between buyers and manufacturers

Coordinating with marketing on promotions and offers

Maintaining visibility into promotional profitability

Measuring the impact of executed pricing decisions

Managing promotions across channels

Minimizing markdown spend

Making sure that stores change prices accurately and timely

Forecasting the impact of potential pricing decisions

Keeping up with competitors' prices

Top Three Operational Challenges Around Setting Prices

15

• But managing promotions across channels was more of an issue for US respondents: 36% said this was top-3 vs. 21% of European respondents

• And US retail respondents were also more challenged by measuring the impact of executed pricing decisions – 30% reported this as top-3 vs. 11% of European retail respondents

By revenue, challenges tend to reflect a trend typical to RSR's results: being stuck in "the middle" is never a good value proposition, whether the middle is defined as the retailer's value proposition to consumers, or defined as where the retailer sits in terms of revenue bands. Retailers that exist in the revenue band between $50 million and $1 billion – admittedly a wide band, but one also partially dependent on the type of goods the retailer sells – are stuck between a rock and a hard place. They have all of the economies of scale challenges that large retailers have when it comes to managing their businesses, but few of the resources to do so.

When it comes to pricing, these mid-sized retailers report internal issues that center on competitive pricing challenges and minimizing markdown spend, two issues that could easily result from scale without efficiency. But there were two notable areas that are exceptions: managing promotions across channels, and measuring the impact of executed pricing decisions, where the largest retailers are much more likely to report that these are top-3 challenges than their mid-sized peers.

Are mid-sized retailers beginning to move ahead here? Possibly. They are certainly small enough to be able to coordinate more than their larger peers. But cloud computing and new software delivery models may also help these retailers become sophisticated enough to measure results more effectively – their operations are less complex than their larger peers, enabling an easier time in measuring the impact of their pricing decisions.

The Consumer Looms Larger And Larger Retailer survey respondents report that increasingly they fear consumers' negative reactions to their pricing strategies (51%), followed by challenges in executing at the level of granularity their pricing solutions provide (41%). After that, challenges shift to a focus on operational issues – the right skill sets, the right organizational alignment, and dealing with resistance to change from stores and lack of coordination with marketing (33%, respectively).

The possibility of negative consumer reaction has grown over time (Figure 15).

Figure 15: Growing Dangers


29% 37%

51%

2013 2014 2015

The Possibility Of Negative Customer Reaction To Changes In Pricing Strategy

16

There are two possible ways to interpret this growing concern. One: that retailers are trying to implement more granular – and thus, more potentially confusing – price strategies and they are worried that consumers won't respond well. Given what we will find below in the Technology Inhibitors, this interpretation is doubtful. Two: even though retailers try to fool themselves into believing that consumer demand for promotions is something they must counteract (rather than something they created for themselves through too many promotions), they are perhaps beginning to sense a weariness on the part of consumers for price games. When the family budget is tight, it's worth it for consumers to try to game the system for the best price. When the economy improves, consumer tolerance for wasting time to save money diminishes. It appears that retailers may feel the beginnings of shoppers' disapproval.

The real differences in organizational impact are driven by performance. Retail Winners, as always, focus on the consumer, while lagging peers focus on silver bullets (Figure 16).

Figure 16: The Long, Hard Road vs. The Quick And Easy Solut ion


Lagging retailers have a history in RSR's reports of seeking technology as the impetus for process change, and it appears that pricing is no exception to that trend: 62% of laggards report that their software capabilities far outstrip their ability to execute, which is perhaps why laggards are also twice as likely as Winners to report experiencing resistance to change from merchandising.

It is Retail Winners who are most concerned about customer reaction – and seek the right set of pricing skills to help combat the problem.

Overcoming Inhibitors When it comes to overcoming their internal challenges, retailers in our survey report the need to build up progressively more sophisticated pricing capabilities over time, better training to improve pricing skill sets, and business process analysis for pricing process improvement (Figure 17).

62%

46%

27% 24% 16%

23% 31%

62%

46%

31%

The possibility of negative customer reaction to changes

in our pricing strategy

Lack of the right pricing skill sets

We can't execute at the level of

granularity that pricing solutions

can provide

Not enough IT resources available

Resistance to change from

merchandising

Top Three Organizational Inhibitors: Selected Differences


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Figure 17: Learning To Walk


All of these priorities suggest that retailers are turning to process improvement, rather than raw technology investment, as the way to increase their pricing capabilities. To some degree, this makes sense. Over the last fifteen years, retailers have taken on very large increases in pricing capabilities, provided by investments in technology. Even Retail Winners, who typically prefer to change the process before investing in a technology to support it, have found themselves swept up in technology-driven change. This is reflected in the year-over-year changes in priorities. For example, the importance of business process analysis has grown significantly: from 26% of respondents reporting it as an opportunity in 2014 vs. 43% today.

But now retailers' understanding of what price optimization and analytics can do for them has improved, and it is time for the skill sets and the processes that utilize those skill sets to catch up.

Learning From Differences Two areas stand out from the rest as issues. It is laggards who are primarily interested in building up their pricing capabilities over time. This isn't surprising, given the tendency to invest in technology as a way to force process change – but at least they are willing to take it slowly. The second area revolves around channel conflict. Only 15% of laggards believe that channel conflict is an issue, vs. 51% of Winners. Given that laggards are supremely confident that they are good at promotions even though there is much evidence available to suggest otherwise, this result is no surprise.

FMCG retailers – those selling perishable goods – are perhaps the most mature retailers when it comes to differentiated price strategies created using price optimization solutions. Their challenges reflect priorities that can serve as an education for other retailers as to what lies ahead: 72% of FMCG retailers (vs. 53% overall) desire to build up more sophisticated pricing capabilities over time, 56% seek to educate merchandising, marketing, and channels (vs. 43%), and 52% seek better training to improve pricing skill sets (vs. 46%).

34%

39%

42%

43%

43%

46%

53%

Tailor a technology solution to my business process and needs

Best practices for managing channel conflict for price

Improved integration technology tools

Better communication and education of merchandising, marketing, and channels

Business process analysis for pricing process improvement

Better training to improve pricing skill sets

Build up progressively more sophisticated pricing capabilities over time

Top Three Ways To Overcome Inhibitors

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Finally, as noted above, mid-sized retailers seem particularly open to lower-cost methods of acquiring more sophisticated technology, for example cloud-based solutions. This willingness is born out in the opportunities to overcome inhibitors: only 19% of $500 million to $1 billion revenue retailers say they need to tailor solutions to meet their needs, vs. 44% of those selling more than $5 billion.

If process change looms large on the horizon, does that mean technology investments will be frozen until changes are complete? Hardly, as we'll see in the next section.

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Technology Enablers

Back To Basics With survey respondents focused on more gradual – and more lasting – changes to the organization, one might guess that technology investments would be placed on hold while this transition takes place. But retailers report significant gaps between what they have and what they expect from it (Figure 18). Their investment plans are by no means frozen (Figure 19, further below), but do not necessarily reflect the priorities suggested by the gaps reported here.

Figure 18: The Basics Need A Boost


One would expect that with all the process change retailers are contemplating regarding pricing, combined with their relative dissatisfaction with their regular price tools, those tools would dominate the list when it comes to retailers' investment plans.

30%

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Rules-based pricing engine

Markdown optimization

Product movement data warehouse

Digital channel price management tools

Digital channel promotions/offers management tools

Integrated end-to-end price lifecycle management

Markdown planning, forecasting, management

Inventory management – availability as a price driver

Promotions optimization

Promotions planning, forecasting, management

Competitive price intelligence

Regular price optimization

Regular price planning, forecasting, management

Pricing Technologies: Value vs. Use

Very valuable Deployed, satisfied

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Unfortunately, time waits for no one, and so instead of focusing on the places where the gaps are the greatest, retailers instead feel the need to add relatively newer capabilities like digital price management tools and competitive price intelligence, rather than reinvest in the old (Figure 19).

Figure 19: The Digital Front ier


In general, it is laggards who report more planned technology spend across the board. Ironically, they are least enamored of promotions planning, forecasting, and management – where, as noted above, they express a near-baseless optimism about their capabilities there.

In terms of general adoption, European retailers report being more satisfied with their promotion optimization tools – 47% are deployed and satisfied vs. only 20% of US retailers. US retailers appear interested in catching up via promotion planning, forecasting and management, where 27% report being in rollout vs. only 10% of European peers. This pattern of adoption repeats for

33%

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17%

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Digital channel promotions/offers management tools

Markdown optimization

Markdown planning, forecasting, management

Integrated end-to-end price lifecycle management

Regular price planning, forecasting, management

Regular price optimization

Rules-based pricing engine

Inventory management – availability as a price driver

Promotions planning, forecasting, management

Promotions optimization

Product movement data warehouse

Competitive price intelligence

Digital channel price management tools

Pricing Technologies "Looking to Change"

Winners Laggards

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markdowns, with European retailers satisfied with their markdown optimization tools, except that US retailers do not plan to catch up in adoption with markdown planning and forecasting.

Vertical results were surprising, with General Merchandise retailers reporting more adoption across the board, even though FMCG retailers in general have been more of the early adopters of price management tools. By size, a significant 25% of retailers with greater than $5 billion in revenue say they have a markdown planning tool implemented, but are looking for change – hinting that there might be new capabilities out there in markdowns that these retailers hope to take advantage of.

Moving To The Digital Front One area that showed significant differences across value vs. adoption was in the digital realm. While digital pricing tools and digital offer management fell into the bottom third in terms of survey respondents' perceived value (45% and 44%, respectively – Figure 18 above), and the value gaps are relatively small (11% for digital price management and 7% for digital offer management), adoption plans are high, especially for digital price management (50% of laggards, and 34% of Retail Winners).

Coupled with the continued intense interest in competitive price intelligence (a top-3 capability in terms of value), it would seem that retailers are responding to the perceived threat of online dynamic pricing. Overall, 62% of respondents report some level of belief in dynamic pricing's lasting impact on retail, and of those, a third believe the impact will be felt most heavily in stores (Figure 20).

Figure 20: Onl ine Pr ic ing's Impact


The concern over dynamic pricing might explain some of the contradictions noted in the Opportunities section, where retail respondents reported a strong interest in competitive price intelligence, but limited use in any real-time fashion within the enterprise: often times, eCommerce is not run or managed by people who are tightly tied into the main business. Merchandisers and pricing teams may not have visibility into the online pricing decisions driven by price intelligence and dynamic responses to price changes.

10%

19%

25%

16%

9%

21%

It's a fad that will fade away

It will find a niche but will not be large part of the retail landscape

It will eventually drive a large portion of online pricing

It will quickly drive online pricing strategies

Consumers and competitors will quickly figure out how to game dynamic pricing strategies

Retailers will have to develop new in-store pricing strategies to deal with it

Future Of Dynamic Pricing

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But there are significant differences by performance. Retail Winners are far more convinced that the impact of dynamic pricing will be limited to online (Figure 21).

Figure 21: An Industry Div ided


Their lagging peers, however, seem convinced that the impact will be felt across the retail landscape, with a third of those respondents focused on stores in particular. This kind of split exists across multiple dimensions. US retailers are more convinced that it is a fad: 14% report this response vs. 14% of UK and EU retailers. And 30% of European respondents say stores will need new price strategies to combat dynamic pricing, vs. only 18% of US retailers.

Tier 2 retailers – those between $500 million and $1 billion in revenue – see online dynamic pricing as inevitable. And of those, half believe it will have a major impact on stores, too.

8%

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8%

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6%

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It's a fad that will fade away

It will find a niche but will not be large part of the retail landscape

It will eventually drive a large portion of online pricing

It will quickly drive online pricing strategies

Consumers and competitors will quickly figure out how to game dynamic pricing strategies

Retailers will have to develop new in-store pricing strategies to deal with it

Perspectives On Dynamic Pricing


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BOOTstrap Recommendations

The Jury Is Still Out When it comes to pricing, retailers stand at the intersection of many crossroads. They believe their promotions are effective, even though they don't have a lot of measures in place to track promotional effectiveness. They feel increased competitive pressures, but have yet to take the steps they need to use competitive price intelligence with any speed or regularity. They continue to feel consumer price sensitivity, but retailers' differing perceptions of that sensitivity across mature markets suggests that this price sensitivity is self-inflicted by hyper-promotional activity, rather than an external force they must respond to.

And finally, even though a majority of respondents are responding to the rise of online dynamic pricing with technology investments to support their own capabilities, they express a largely divided response to the notion that dynamic pricing may have a lasting impact on retail in general.

So how do retailers navigate all of this uncertainty?

Focus On The Process, But Keep The Customer In Mind It wasn't that long ago that any technology strategist worth their salt espoused "people, process, and technology – in that order." The technology came last, designed or configured to fit the process and the people. But when it is technology that drives process change, that adage's order gets upended. Pricing has encountered exactly this problem – you can't really design a "promotion optimization process" or a "dynamic pricing process" without understanding how the technology works. And you can't do that if you don't have the right skill sets in house to translate how the technology works into a process that enables its effective use.

And so, fifteen-odd years after price optimization reached its tipping point in retail, retailers seem to feel that they are ready to truly design a pricing process – one that takes advantage of the capabilities they already own. That's the good news. The bad news is they are increasingly afraid that the more sophisticated they make their pricing process, the more consumers will notice – and react negatively.

The answer is in some ways as simple as Google's founding philosophy: don't be evil. It's not always easy to stay true to the ideal (as Google might testify), but as retailers evaluate what is possible, they would do well to keep in mind choices that do right by the customer while also maintaining relevancy against competitors.

Accelerate Efforts To Measure Promotion Effectiveness Laggards' naiveté in this regard was truly breathtaking. To assert that they have effective promotions while at the same time neither measuring the positive or the negative impacts of their promotional efforts reflects an astonishing – and unwarranted – confidence in their abilities. They are lagging retailers for a reason: their performance is not at the same level as their peers. Investing in online pricing tools, as respondents report that they feel they must, can do more than build a response to dynamic pricing. Online behavior is much easier to track and measure than promotional activity that takes place in the brick and mortar world. As retailers build stronger online capabilities, they need to build in plans for how those capabilities will be measured, and processes for acting on those insights.

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Make Sure Your Competitive Price Policies Are Consistent There were a lot of reported inconsistencies between the competitive threats that retailers say they feel and how they are responding to those threats. Transparency may expose conflicts in price, but it also exposes conflicts in policy too. If the strategy is to execute one price across channels but match competitors' prices when it counts, then those policies need to make it to stores, particularly in response to consumers standing at shelves with smartphones out and on. "Being competitive" is a loose and messy term in a store environment where there is little discretion in responding to consumers' demands for competitive pricing.

This is a clear opportunity for more real-time price intelligence. Retailers say they are increasingly collecting granular and near-real-time price intelligence data. But in this survey, they hardly report using it in a real-time fashion. It is perhaps time for that change – most especially to help store associates be more clear about how to respond to price transparency at the shelf.

Monitor Dynamic Pricing Behavior – Don't Be Afraid To Experiment Retailers are largely divided about the ultimate impact of dynamic pricing on consumer behavior. While retailers are increasingly afraid of negative consumer reaction, the fact that dynamic pricing exists almost solely online today is a boon – it gives them the opportunity to carve off small segments of consumers to provide them with a different price experience than the general population of shoppers. Retailers can experiment without exposing their price strategy for all to see.

What form that experimentation takes depends on the retailer and the type of goods sold. But while much has recently been made about the psychology of economics and pricing, the reality of how that works in practice – and whether retailers and shoppers can benefit from it – remains to be seen. But if retailers don't get on the learning curve, they may never know.

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Appendix A: RSR’s Research Methodology The “BOOT” methodology is designed to reveal and prioritize the following:

• Business Challenges – Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise.

• Opportunities – Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and “also-rans.” Within the BOOT, we can also identify opportunities missed – and describe leading edge models we believe drive success.

• Organizational Inhibitors – Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning Retailers understand their organizational inhibitors and find creative, effective ways to overcome them.

• Technology Enablers – If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers.

A graphical depiction of the BOOT follows:

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Appendix B: About Our Sponsors

dunnhumby is the world’s leading customer science company. Our expert consultants in the Price and Promotions practice help retailers develop and refine their pricing strategy to drive shopper loyalty, financial performance, and consumer price perception. Pioneered by KSS Retail, our PriceStrat and Heartbeat analytics software solutions provide merchandising, marketing and category management leaders with accurate, predictive insights on customer behavior so they can make smarter decisions. dunnhumby employs over 2,000 experts in offices worldwide and works with a prestigious group of companies including Tesco, AutoZone, 7-Eleven, Southeastern Grocers, O’Reilly Auto Parts, SpartanNash, and ABC Fine Wine and Spirits. Visit http://info.dunnhumby.com/RSR.

360pi derives profitable insights from product and pricing big data to help leading omnichannel retailers, etailers, and brand manufacturers compete and win with shoppers. 360pi’s customer base accounts for over $US200 billion in annual product sales and includes Ace Hardware, Build.com, and Overstock.com, along with several Fortune 500 consumer products companies. With the majority of in-store purchases being influenced online, 360pi helps retailers and brands successfully navigate the multi-channel landscape with real-time insight into who is selling what, where, and for how much. Ultimately, 360pi customers make smarter decisions faster to drive increased revenues and margins across all channels.

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Appendix C: About RSR Research

Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by:

• Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses;

• Identifying industry issues that solutions providers must address to be relevant in the extended retail industry;

• Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry.

Copyright© 2015 by Retail Systems Research LLC • All rights reserved.

No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact [email protected] for more information.

Pricing 2015: Learning To Live In A Dynamic, Promotional World · According to this year's benchmark, retailers have figured out how to use pricing and promotions to drive sales,

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