RETAILNETGROUP STRATEGY ALERT No.

5 Issue
August 2008
PRICING OPTIMIZATION

Greetings! In This Issue

Why is it Important?
What Does it Do?
RNG has recently updated our work on Supplier Opportunities
retailers developing pricing as a strategic Retailers and Pricing
capability, a retailer growth strategy for Optimization
merchandizing innovation that raises some RNG's New Website
interesting opportunities for CPG firms.

Pricing as a strategic capability focuses largely

on pricing optimization programs but has many RNG's New
consumer centric implications. Retailer Website!
adoption of pricing optimization tools and
approaches is widespread with RNG estimating
over 80% of supermarket ACV involved in RNG has successfully
some way. A recent survey by RSR Research indicated that 61% of FMCG launched its new web tools,
Retailers rated pricing strategies as very high in strategic importance. Many effectively improving
are engaging consultants and software firms like SAP, Oracle, Revionics, navigation, database
and DemandTec to provide price optimization capability into their pricing reporting tools, photo
and merchandising organizations. tours, retailer news
capabilities, and many
Unlike category management or even more recently the newer discipline of other features.
promotion management, pricing optimization programs have not been
collaborative between retailers and suppliers even when discussing the To learn more about RNG's
strategies and rules that guide and constrain the process. web tool capabilities or to
schedule a web demo
This week's newsletter sheds some light as to why pricing optimization is please contact Mark Byrd
an important enabler for both retailers and suppliers to find growth and at 757-270-3839
profitability in an increasingly challenging consumer environment.

To access any of the reports mentioned below please follow the links on
each story or contact us to request a briefing. Prior Issues
Tim O'Connor, Vice President
Issue #1
Retailnetgroup.com
Mobile Retailing - How mobile
based commerce and
marketing strategies are being
Why Pricing Optimization? utilized by retailers
worldwide.

Issue #2
Price alone is no longer a strong differentiator
in itself, but it remains a critical driver of Health Services - Explore how
perception in the marketplace, retailers are trying to re-
competitiveness, and profit leverage. organize the way that health
and wellness services are
The current economic challenges heighten the need to be right on price as provided.
the recent scrambling by Whole Foods demonstrates. Retailers' dependence
on promotional programs continues to grow, increasing their vulnerability
Issue #3
to shoppers that "cherry pick" rather than building a loyal core shopper
base. And of course, cost pass-through is more strategically complex in a Express Stores - Convenience
recessionary or "stagflationary" economic environment (when inflation and food retailing is changing
stagnation occur simultaneously). As the complexity of pricing increases, globally as consumers express
so does the risk of errors, further accelerating the need for an intelligent their preference for healthy,
approach to pricing. fresh, and ready to go (or
consume) foods.

Issue #4
What Does Pricing Optimization Do?
Private label - Strategic store
brand programs are a
Price optimization ultimately simplifies the complex - significant growth strategy for
enabling retailers to merchandise products with retail leaders.
increasing precision and efficiency, moving from
national to zone to cluster to store-specific pricing,
promotion and assortments. with standard Meet Our
heuristics, business processes, and metrics. Analysts
These toolsets provide analytical horsepower and
breadth of view that traditional methods cannot.
Pricing optimization tools generate optimized price
recommendations based on the price elasticity of
items, categories and departments all the way down
to the store level, as well as provide the implicit
margin and sales consequences of those
recommendations and the alternatives.

This capability enables the retailer to focus on pricing strategies to satisfy

its core shoppers, therefore, pricing optimization needs to focus on Dan W. O'Connor is the
enabling suppliers and not to separate pricing or over complicate the President & CEO of the
RetailNet Group. He also is
business process.
the Founder of Management
Ventures, Inc. (MVI), a WPP
Group company. Dan is a
Price Optimization - Why is it Important? widely known industry speaker
and thought leader.

Understanding pricing optimization is a key capability and enabler for

growth. It enables suppliers to:
• Determine the best role for categories profit builder, turf protector,
and so on - given shopper preferences.
• Meet category objectives by adjusting regular everyday prices in
conjunction with promotions and clearance or markdown price.
• Improve decision support with "what if" analysis to see the impact
of pricing on sales, profit, and price image for any SKU across the
assortment. Aaron Chio is a Senior Analyst
leading RNG's development of
Pricing optimization enables a strategic approach to pricing and frees new research, insights and
suppliers to act on customer centric insights. While pricing optimization is a growth strategies in Latin
developing science, there remain a number of limitations, including: America.
• Marketing drivers, which are not an input to the model.

• Innovation, which is difficult to model.

• Consumer/shopper insights, especially of key target segments,

are still highly influential to pricing strategy.
In-store promotion, marketing landscape and retailer expectations will
change and there is a big opportunity for vendors to guide and lead to
better consumer solution.

Tim O'Connor is Vice President

at RNG, currently responsible
Retailers and Price Optimization for RNG's Growth Strategies
 Curriculum and European
Increasingly more and more retailers are utilizing pricing optimization tools market insights.
to make decisions around pricing. Retailers benefit from price optimization
in several key different ways, including:
• Margin and revenue enhancement - Intelligent, rule-based pricing
is a key driver of profitable growth. However, most retailers
ensure profit improvement objectives are tempered with solid and
timely competitive information.

• Increasingly targeted and relevant merchandising - Retailers with

strong customer segmentation models stand to benefit from the
enhanced precision with which they can localize and price their
assortment.
Keith Anderson is a Senior
• Greater visibility into pricing decisions' impact on image and Analyst and responsible for
shopper behavior- Price change impacts are continuously RNG's North American research
monitored and measured at various levels: business unit, practice and transformational
department, category, and item. The tools help articulate various capabilities
possible outcomes (i.e. the model's recommendation and its curriculum.
alternatives) and their implications.

• Strategic freedom - A more strategic approach to pricing lessens

retailers' need to price opportunistically or rely heavily on
vendors. Promotional funds are often redeployed to support
marketing and shopper development objectives.

RetailNet Group is the leading insight and advisory firm focused on

retail growth strategies and consumer-facing transformational
capabilities. We are deeply experienced retail/consumer analysts
and strategists working exclusively to help brand-led businesses
and large-scale retailers grow.

Sincerely,

RetailNet Group
Note: Articles contained in this newsletter are collected from a variety of sources and
links can expire over time.

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