Delivering profitable, customer-centric, growth through Price, Promotion, and Assortment
Price, Promotion and Assortment are arguably the most important levers to drive growth, improve profitability and engage customers. Applicable across an expanding store portfolio or omni-channel environment, it is critical that the customer is at the heart of the decisions associated with these levers. In this article, explore how to put the customer at the centre of these decisions, and how this translates to profitable growth.
Price
There are many solutions for price optimisation that model cross-elasticities, volumetric, and various other factors; however, the most critical factor in growing customer loyalty is the definition of the inputs or Known Value Items (KVIs). KVIs are the items that matter to your most important customers every day.
Optimisations will typically run based upon sales or margin objectives with various rules, constraints and protected / KVI items. The optimisation with increase and decrease prices across the assortment that impacts demand and associated volume. This dynamic may take volume from the competition, shift the average selling price and associated margin mix.
If you don’t have the right KVI’s, an optimisation can easily lead you in the wrong direction. Imagine increasing the price of an item that is important to your most price sensitive or loyalty customers with the intention of shifting sales to an alternative item. Will they switch to the alternative item - or - will they switch to an alternative store? Your competitor?
KVIs are critical. At datasapiens, we agree on the approach to KVI generation and refresh with our clients. However, typical factors include customer loyalty, price sensitivity, promotion/non-promotion weight, item appeal, exclusivity, substitutability, sales weight, etc.
It is difficult to assign the exact impact of KVI pricing; however, it is foundational to building long-term customer loyalty and sustainable growth.
Promotion
The amount of promotional data produced by retailers can be mind-boggling! This data arises owing to the number of dimensions involved:
Mechanic: Price-off, % off, Multi-save, Cross-Sell, etc.
Media: Brochure, Newspaper, TV, in-store, online, etc.
Duration: Day, Date, Range, Period, etc.
Location: Generic, Regional, Location Specific.
Customer: Mass, Segment or Personalised
As a result, evaluation can be complex. datasapiens can take various approaches to promotion evaluation according to client requirements and data availability. These may include a simple comparison to benchmark, customer evaluation, A/B testing and Multi-Touch Attribution.
One popular approach is understanding the impact on the customer pre, during, and after promotion to understand the net effect. We classify promotions based upon those that are good for customers vs. those that are good for the business, resulting in a four-block matrix.
Reducing poor promotions (unsuitable for either customer or business) can result in significant savings in terms of promotional investment. This saving can be banked, re-invested in good promotions to make them even better, or invested in other areas, for example, base price or personalised media.
Promotion spend in context
A retailer may have 30% of sales made on promotion
Assume the average discount is 20%
Assume poor promotions account for 20%
For a $2 billion retailer, reducing poor promotions by 20% could save $4.8 million per year.
Savings from wasted promotion spend funds the datasapiens solution many times over.
Assortment
Curating the right assortment is the foundation of retailing. At datasapiens, we put the customer at the heart of the process and combine their behaviour and preferences with business performance. This process is critical to driving profitable growth. Some of the critical metrics and levers are as follows:
Exclusivity: This fact measures the extent to which an item is the only item in the customers' repertoire from the category. The higher the exclusivity, the greater the importance to the customer, as there is no alternative. These items must be protected as deletion will result in lost sales, reducing overall purchasing repertoire and leakage to the competition.
Substitutability: This fact measures the extent to which one item may be substituted for another within the category. A high level of substitutability indicates a low level of customer loyalty to the item or brand; if the item is unavailable, the customer can easily select an alternative. This presents a trading opportunity.
Trading: Good-selling items aren't necessarily the best if they are highly substitutable. Imagine two second-tier brands with good-selling items that are highly substitutable. Customers are not loyal to either; they will happily switch between them. The buyer can choose the item to keep on the shelf, while the suppliers can bid to stay. This can result in an incremental margin aligned to a Joint Business Plan JBP with a supplier, a lower retail price for customers at the same margin, or other options.
Customer Centricity: The example above shows how customer metrics can drive business performance. In reality, customer focus is much greater, from product scoring by customer profile to localisation based on customer profile, shopping mission or regional nuance. The result can be unique assortments by store.
Business Impact: The combination of customer centricity with hard business metrics related to sales and margin delivers growth.
Customer-centric assortment impact
A retailer may implement a significant change on 15% of the assortment each year
A significant change will likely result in base sales growth of 3%
Assume a based margin of 20% and an improvement of +0.3%
For a $2 billion retailer, a customer-centric assortment delivers an extra $2.7 million profit pa
Customer-centric assortment funds the datasapiens solution many times over
Conclusion
Putting the customer at the heart of decision making is key for sustainable growth. This is particularly important around the key levers of Price, Promotion and Assortment. Customer centric growth adds value as illustrated in the examples above.
For a $2 billion retailer
Improved promotion spend could release $4.8 million pa for reinvestment
Customer-centric assortment can add $2.7 million per year
When this approach is pursued collaboratively with the suppliers, as outlined last week, these gains can be multiplied. Profitable, customer-centric growth, comes from enabling retailers to make effective, customer-centric decisions and take action. These solutions are no longer restricted to global players; they are available to all retailers. Now.
Get in touch today to learn how datasapiens can underpin your growth.
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