Magazine Article | February 1, 2006

Realize Price Sensitivity, Improve Profitability

Source: Innovative Retail Technologies

Study customer patterns, adjust pricing, and increase customer loyalty.

Integrated Solutions For Retailers, February 2006

The ability to exhibit the proper products and price them right is of utmost importance for convenience stores. For 7-Eleven, which operates 5,800 stores and serves more than 6 million people in its stores each day, managing prices is the key to increasing loyalty and growing profitability. 7-Eleven was the first to operate 24 hours a day and sell fresh-brewed coffee in to-go cups. To continue innovating, Kay Trapp, manager of pricing at 7-Eleven, sought to analyze and understand product/pricing relationships to drive larger customer purchases. "With hundreds of price zones for thousands of items, we needed a solution to enhance optimal pricing decisions," states Trapp. "We managed prices at the item level, but we didn't have the information to determine if we were maximizing profits without jeopardizing customer satisfaction."

Sales Forecast Accuracy Is Key To Vendor Selection
7-Eleven sought to better understand and forecast customer demand, while improving sales and competing with other convenience stores. Price optimization can provide suggestions for increasing and decreasing prices of certain products based on several factors including store location, customer patterns, and season. This allows the retailer to increase profitability without harming customer loyalty.

7-Eleven followed a three-step process to evaluate and select a solution partner. These steps included initial discovery, a forecast test, and a controlled pilot project. The initial discovery phase narrowed the selection down to two providers, based on the level of retail expertise and flexibility in the solution. "It was important for us to validate the science and models, and we felt a forecast-accuracy test was a critical first step," says Trapp. Trapp's team compared its sales forecasts to the vendors' forecasts to evaluate the accuracy of the demand models, ensuring the solution could uncover the relationships between price changes and sales. The two vendors were given price and unit sales for a prior 18-month period, while 7-Eleven held the final three months of unit sales. Khimetrics' demand modeling technology predicted unit sales for the three-month period with 98.28% accuracy.

7-Eleven identified two similar markets for the pilot; Khimetrics made pricing recommendations for a panel of test stores, while 7-Eleven priced products using its current method and matched the panel of control stores in the same metropolitan area. Khimetrics started with demand modeling, followed by optimizing prices for about 2,000 products over a four-month period. Results from the test stores were compared with 7-Eleven's control stores. Khimetrics provided a set of price recommendations, which significantly outperformed the control stores in unit sales and profits on a per-store, per-day basis. 7-Eleven chose Khimetrics' KhiDEMAND, with the Khi Base Price Management and Khi Promotion Management solutions.

7-Eleven understands that product relations and purchasing behavior are key in optimizing prices. 7-Eleven can measure price sensitivity in each category of products sold, including highly regulated, price-sensitive cigarettes. Overall, store performance improvements were achieved without adversely impacting store traffic. Reporting features allow 7-Eleven to modify product pricing quickly to improve store performance. "Khimetrics helped us tailor the analysis and presentation of information so that it was meaningful for our organization," says Trapp.