Magazine Article | March 20, 2008

What's All The Price And Promotion Commotion?

Source: Innovative Retail Technologies

Cross-channel retailing has led to consumer-disgruntling price and promotion mismanagement. How can you avoid erroneous disparity among your channels?

Integrated Solutions For Retailers, April 2008

The wallet share struggle retailers face is exacerbated by a mushy economy, resulting in an extremely price-conscious consumer. This doesn't sit well with retailers that have bought into price management strategies such as geocoding, whereby different consumers pay different prices based on their geographic profiles. It's also a slippery slope for multichannel retailers, who must not only manage pricing and promotions decisions in relation to competitive pressure, but must also protect themselves from themselves in terms of cross-channel price and promotion strategy.

Alexi Sarnevitz, senior director of global retail strategy at SAS, loves the complexity presented by retailers that experiment with price and promotion strategies, but he cautions that too much experimentation can become costly. Strategic promotion execution, he says, starts with how retailers respond to consumer demand. "It's the retail mentality to organize a store by product category, but there's this movement toward building the store around the consumer demand," he says. "This is the beginning of strategic promotion, but you have to balance it with practicality. Even if you could whittle your customer base down to six 'types,' you couldn't possibly offer six different stores within your store to cater to consumer demand," he says. But many retailers, especially in the grocery segment, have been able to create 'store within a store' concepts by repositioning merchandise. Food Lion, for instance, is one of many grocers that have built a c-store concept within the grocery store by repositioning many convenience-oriented items that were around the outer wall of the store to the center, making it easier for consumers to get a meal to go, milk, or bread. Merchandising decisions such as this, however, are best made with hard data gained by analyzing consumer behavior.

Jason Jacobs, founder and CEO of cross-channel solutions provider CoreSense, has built a company around helping small and medium-sized retailers achieve channel integration early on. "With the advent of the Software as a Service [SaaS] model, the small retailer is empowered to execute cross-channel strategies using fully functional platforms that provide payback within the first year," Jacobs says, "and this delivery model ensures it can happen at an annual cost that's less than it pays to process credit cards."

As it relates to pricing and promotion, Jacobs envisions a future in which the small retailer is more agile than its tier-one counterpart. "Today's retailer is already capable of measuring success at the product level, where before they measured it at the channel level. They can determine which of their marketing, pricing, and promotion efforts are working, and they  can act on it," he says. While brick-and-mortar retailing is a tricky place to tinker with promotion and pricing nuances, the multichannel space is even trickier. While Sarnevitz is quick to point out that multiple channels offer more opportunity to experiment, they also offer more opportunity for error as consumers evolve their shopping behavior. "There's this mind shift toward the idea that there's one channel with many touch points or interaction points," says Sarnevitz. "Consumers can always be online, even in the store via kiosks or PDAs. That makes being consumer-centric easier — technology is an enabler of consumer centricity. You can still have the store organized by department [with some exceptions, i.e. tailored assortments in certain departments based on the local audience's buying behavior], but you can personalize the shopping experience inside the store using the consumer's own digital device or in-store kiosks," he says. Empowering consumers with technology is also enabling to you, the retailer. In order to customize the promotion experience, the consumer must sign in and tell you what they're looking for. In time, you'll apply purchase history information to the concept and further hone the custom shopping experience, while simultaneously presenting the 'endless aisle' concept. "A Web interface allows you to personalize promotion and even price in an economically feasible way," concludes Sarnevitz.

Manual Pricing Strategy A Challenge
Price management is a primary concern for retail customers of enterprise software vendor Escalate Retail, according to the company's director of product marketing, David Bruno. "Price and promotion synchronization is among the top problems our customers face," he says. "Retailers are challenged to find a way to stay synchronized and centrally manage pricing across channels without having multiple pricing masters and promotion masters that have to be managed and updated manually," he says. But can price disparity cause consumer complaints? Bruno says yes, but that the perceived issue is not a grave concern in the right merchandising environment. "Many retailers still have a one-price-fits-all philosophy, so when they jump channels and one gets out of synch, customer service issues can pop up," he says. "Finding a way to compete in the online space is different altogether, with so many different site options for consumers and shopping and price comparison engines that retailers have to deal with. Trying to find that balance between one-price-fits-all and finding the right price for the right customer in the right location has really been a big challenge," he says.

It's commonly accepted that high-value or unique merchandise generally affords retailers more flexibility in price and promotion management and that the closer the merchandise is to a commodity, the more synchronized price and promotion must be, regardless of channel.

Bruno also presents an example from the hospitality industry, suggesting that cross-channel retailing will tend in this direction. "When you book air travel by phone, and you let the customer service representative know that you see a cheaper rate online, it's not uncommon for that customer service representative to suggest you go ahead and book it," he says. In this way, retailers are using pricing and promotion to drive their channel strategies. "We talk to many retailers who are making a real push to move customers to one channel from another, and they're using pricing as the bait to move their customer base," confirms Bruno. Channel strategy is fueled by cost to sell and fulfill, and retailers trying to persuade consumers to shop online are reducing the risk of channel variance in pricing by using shipping as the promotion. "Companies are using shipping as a promotional vehicle and an upsell vehicle. Amazon has been running a free supersaver on orders of $25 or more for a long time. I think, instinctively, it's highly motivational for consumers to try to get to that free shipping amount," says Bruno.

Channel expansion is also changing the promotions game, specifically in terms of catalog retailing. "Before, you might have sent out one or two big catalogs every year; now you're going to send out a bunch of thinner catalogs that are representative of the assortment, to pique awareness and drive consumers to the Web," says Sarnevitz.

Strategic Price And Promotion: Worth Pursuing?
Bruno says the justification for getting strategic about price and promotion is entirely economic. "Perhaps the most obvious and least interesting benefit is the reduced maintenance it takes to maintain price, promotions, and number of systems across the enterprise," he says. "A softer benefit is consistent customer service and confidence that your execution is matching your strategy. Whether it's a merchandising or a marketing strategy, you now have the confidence to know that sales results, or lack thereof, are a direct result of strategy, not a reflection of failed execution or erroneous education."

Sarnevitz says successful execution of price and promotion leads to double-digit sales increases and very high single digit margin increases. "Price is an incredible lever," he says. "If you're selling something for 100 bucks but you could get $110 for the same item, that's $10 in profit to the bottom line," he says. "Long term, if you're doing it right and you're personalizing the offers, there's a market share benefit, and you're building that relationship with the consumer."