Beyond Discounts and Deals: Achieving a Balanced Pricing and Promotion Strategy

Best Practices by Kurt Salmon

Most retailers readily admit that the chronic use of excessive, and often unplanned, promotions can have serious consequences in terms of margin erosion and erratic sales. Still, most willingly suffer those consequences in exchange for the short-term benefits of hitting top-line sales goals and stealing share from competitors. But what many retailers fail to realize is that this continual reliance on reactive promotions comes at an even steeper long-term cost. It often means foregoing a disciplinedexecution of a pricing strategy that would both enable precision and optimization, and also build customer loyalty by instilling confidence in a consistent price-value proposition.

There is nothing wrong with price-driven promotions in and of themselves. They can be an extremely effective way to attract new customers and drive incremental traffic. There is also something inherently exciting about a price promotion; the sense that as a customer you’re “seizing an opportunity.” Promotions condition the customer to expect the unexpected, create a sense of urgency, and can quickly deliver an increased conversion rate or larger basket size.

However, recent promotional excesses may have had an adverse impact on customer behavior. Over the past few years in particular, retailers’ frenzied price changes have conditioned customers to think that the ticket price is not real, and cynical customers have become numbed to typical discounts, requiring ever deeper price cuts to stimulate an increase in demand. [Read more…]

Derailing the Showrooming Scare

The Robin ReportIt’s easy to see why showrooming is keeping many brick-and-mortar retailers up at night. In fact, it looks like the beginning of a bad epidemic-outbreak movie — some retailers even feel powerless to slow its advance and are reduced to simply watching, one by one, as those around them succumb and close their doors for good.

But in reality, retailers aren’t powerless against showrooming. They have a choice: they can either combat showrooming or embrace it. The decision to combat or embrace it depends on the level of susceptibility a retailer may face, which in turn depends on the demographics of the retailer’s target customers, product price points and merchandise type.

Demographics. A recent Kurt Salmon and Prosper Corporation survey of 8,000 consumers revealed that 70 percent of consumers ages 25 to 54 with smart phones use them to comparison shop, up from 62 percent a year ago. And of those who use their smart phones to comparison shop in-store, almost one in three ultimately buys the product online, according to ClickIQ. Older consumers are getting more comfortable with showrooming as well. The Kurt Salmon survey found that 49 percent of consumers ages 55 to 65 use their smart phones to comparison shop. And as the population ages, the percentage of the population showrooming will continue to grow.

Perhaps not surprisingly, wealthier consumers are also more likely to showroom. The Kurt Salmon survey showed that 65 percent of consumers with incomes over $150,000 a year comparison shop on their smart phones, compared to only 56 percent of consumers who earn under $50,000 a year. [Read more…]

From Profit Center to Competitive Mandate: Shifting Your Shipping Strategy

Although the rush of consumers shopping online shows no signs of slowing, with an increase of 15% during the 2011 holiday season alone, many retailers’ shipping strategies haven’t kept pace.

A December survey of 8,000 U.S. consumers revealed that 86% thought free shipping was important or very important when shopping online. And retailers responded — 93% of retailers said they offered free shipping at some point during the 2011 holiday season, according to the National Retail Federation.
No longer just impacting a standalone profit center, shipping pricing and policies have become potent and competitive tools to drive revenue and market basket size. Leading online retailers like Zappos and Amazon have stretched the use of shipping and returns policies well beyond the seasonal promotional spur to become a core component of their brand’s value proposition.

The Robin Report

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Consider the implications. The question is no longer “How much  does this policy or promotion cost?” but rather “How does it support the brand and drive sales?” Given that consumer and competitive pressures to offer discounted or free shipping will only increase, how should a retailer think about profitability related to shipping?

Since shipping is now a marketing strategy, we should evaluate it on its ability to support the brand and improve sales. An effective modern shipping strategy may not stand alone as a profitable offering, but should increase revenues and profitability by driving changes in customer behavior. Similar to other marketing initiatives, a successful shipping strategy should increase basket size, conversion rate and purchase frequency, among other metrics.

Consider taking a page from the book of Tony Hsieh, CEO of Zappos. In a recent article in Harvard Business Review, he laid out his view that while shipping alone may not always be profitable, it should spur long-term sales and customer loyalty. [Read more…]

The Omnipresent Retailer: Creating a Demand-Responsive Value Chain

Best Practices from Kurt Salmon

Many retailers are striving to better respond to changes in consumer demand, and it’s easy to see why: They’re pressed to reduce inventories and cut supply chain costs at the same time that the shopping patterns of American consumers have become virtually impossible to predict.

Making matters even more complicated, consumers now have unprecedented access to an infinite number of products and a virtually limitless number of places at which to buy them. They expect to be able to buy exactly what they want exactly when they want it, and if one retailer can’t make that happen, another one (or a dozen others) can.

That’s where a demand-responsive value chain comes in. By shortening cycle times and increasing collaboration across the value chain, retailers can ensure they have the right product, in the right place, at the right time.

1. Shortening Cycle Times

Many retailers are beginning to move production closer to home (leveraging data to inform smarter decisions on the best manufacturing locations) as a way to shorten cycle times. Shorter cycle times can improve responsiveness to demand and increase inventory effectiveness.

The global product margin metric measures the cost from each point of manufacture to each point of distribution and the unique retail price from that point of distribution. Keeping this number in mind allows retailers and wholesalers to optimize total margin by choosing the best manufacturing locations based on discrete costs from multiple points of supply to multiple points of distribution and the retail price at each point.

But after a retailer’s sourcing decisions have been made, there are still several steps that can further decrease cycle times. [Read more…]

Five Keys to Success with a Slimmed-Down Inventory

by Jon Mays and Brooks Kitchel

The growing emphasis on ever-leaner retailing means the days of hedging inventory bets with colossal surpluses are gone for good. The costs of inventory mishaps—both in terms of actual bottom-line economics and brand experience for customers—have driven many retailers to significantly reduce their inventories.

Meanwhile, it’s grown increasingly difficult to predict the actions of American consumers, whose intentions are less and less correlated to their actual behaviors since the recession.

While most retailers have cut their inventories accordingly, leading retailers are optimizing their remaining inventory to get the most bang for their buck.

1. Aggressively share inventory across channels

Truly sharing inventory across channels creates the opportunity for tremendous customer experience benefits and can help avoid having to mark down large amounts of leftover merchandise.

From a customer experience perspective, shared inventory increases the likelihood that a customer will be able to purchase a product in a particular size or color, regardless of channel. For small bricks-and-mortar locations, sharing inventory can open up a whole new array of choices for customers. [Read more…]

Weathering Economic Climate Change: Retailing in the Age of Uncertainty

Best Practices From Kurt Salmon

The retailing landscape looks much as it did in the throes of the Great Recession. Unemployment remains persistently high, consumers lack confidence in the economy, and talk of a global economic crisis is everywhere.

But move in closer and the picture is more complex and detailed than it was three years ago. Despite the barrage of bad news and feeble macroeconomic growth, consumers have returned to old habits — spending at unprecedented levels, in fact.

Consumer confidence, once closely linked to spending, hovers near 30-year lows. But as the chart below shows, actual spending has bounced back—hitting an all-time high of $9.5 trillion in September.

The Robin Report - Kurt Salmon

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Furthermore, a modest 4% gain in income and a 34% drop in the savings rate over the past year slightly outpaced inflationary pressures (e.g., increased housing, health care and fuel prices). Combined with a 2% drop in consumer debt (see next chart), these factors mean employed consumers have more money to spend.

The American consumer appears to be on a precipice, precariously balanced between very modest personal gains and the increasing drag of high long-term unemployment and a staggering deficit. Many are calling this the “new normal,” a position of perpetual uncertainty and ongoing anxiety.

The New Normal: A Consumer Divided

In fact, the new normal is that the American consumer can no longer be summed up as a single shopper. The new normal is the trifurcation of our economy among the long-term unemployed and underemployed, the lower- and middle-class at risk of slipping into poverty, and high-income earners. [Read more…]

Reverse Globalization: The New Dollars and Sense of Near-Sourcing

Best Practices from Kurt Salmon

Near-sourcing, or producing products closer to where they are ultimately sold, is growing in popularity. As more companies bring production closer to home, they’re putting a new twist on globalization, or in some cases, reversing it altogether. Kurt Salmon retail strategist Vinod Rangarajan discusses this increasingly popular trend and how retailers can make the most of it.

Q: What’s driving the increase in near-sourcing?

A: Several factors, the first being supply chain inflation. The cost of producing products in China has been steadily rising as labor rates increase. So the response of many retailers was to move to other Asian and Southeast Asian nations, like Bangladesh and Thailand. But transportation costs are also rising, spurred by higher oil prices. This drove some U.S.-based retailers to look for locations closer to home, like Central and South America.

Q: But there’s also a customer experience element to near-sourcing, right? [Read more…]

Bridging the Gap

The Benefits of Collaborative Profitability Management

Financial pressure from all angles—increased raw material, labor, transportation and warehousing costs—combined with a reluctant consumer, places extra emphasis on identifying cost-saving opportunities throughout the retail organization. Although many retailers have seemingly weathered the recession and are back on the road to profitable growth, increased financial performance is always important, especially to thrive in the current retail environment.

Increasingly capable systems solutions are leading the way toward cost reduction by measuring and collaboratively managing the profitability of a trading partnership for the first time.

Visionary partnerships, courageous enough to share information more freely, are starting to break out of their silos and reap the significant benefits of collaborative profitability management (CPM), which include increased sales (2% to 4%), decreased COGS (1% to 3%) and inventory reductions (1% to 3%), and which can ultimately yield increased revenue and gross margin.

The Basics Behind CPM

CPM is a new concept combining activity-based costing (ABC) with the power of network optimization and simulation across both sides of a trading partnership to create an integrated approach for evaluating the net profitability of a wide variety of product flow and handling options.

Activity-based costing solutions drive general ledger costs down to the level of categories, vendors and SKUs, allowing for the exploration of differences caused by unique business characteristics such as merchandise cube and weight, shipment configuration and trade promotion considerations.

Network optimization and simulation solutions identify the impact of different supply chain network configurations on transportation, fixed and variable operating expense, inventory cost, and service.

Most current solutions do one or the other—not both. But providers on both sides are extending their reach to offer increasingly integrated solutions combining elements of ABC and optimization to offer more comprehensive guidance on initiatives that drive improved profitability. And, for the first time, with this integration comes a foundation for extending profitability management across the end-to-end supply chain—spanning trading partners in the process.

Why Embrace CPM?

Stepping out of the siloed view of retailer or supplier to understand cost to serve and net profitability of a trading partnership dramatically improves strategic and tactical decision-making. It provides an entirely different view into the cross-organizational “contribution” of entities such as categories, sub-categories, SKUs, customers and suppliers to the bottom line.

The information generated from a collaborative profitability management program can be used to drive opportunities in the areas of pricing, promotion planning and assortment planning, just to name a few. Coupling collaborative ABC profitability modeling with the ability to optimize across the shared infrastructure of a trading partnership drives even more benefit.

Starting the CPM Process

Profitability management is an evolution that begins with enabling resources, data and tools to achieve an internal, actionable, multilevel view of net profitability. Once in place, finding the right partner, moving outside the silo and beginning to share information open up a whole new set of opportunities.

A handful of suppliers and retailers have begun to test the waters, most notably in consumer packaged goods, and they are seeing tremendous benefits.

Case Study

Client:  Multibillion-dollar regional consumer packaged goods wholesaler and retailer.
Challenge: Maintain, and potentially strengthen, already razor-thin margins in the face of significantly increased competition from larger national grocers.

Solution

Kurt Salmon worked with a cross-functional client team to reach a consensus design for the new ABC approach and a vision for how the output would be used to increase profitability.

  • Kurt Salmon worked with the client to translate the consensus design into a robust ABC technology solution that:
  • Provided the foundation for establishing the correct framework for building a new pricing program for customers
  • Established accurate cost metrics for restructuring transportation fees to customers
  • Identified significant areas of cost within the client’s supply chain
  • Enabled effective negotiations with vendors on ways to improve profitability
  • Provided insight into individual SKU profitability to restructure categories (SKU optimization)

Results

Kurt Salmon worked effectively with the client to design and build an ABC solution that provided individual profit and loss statements at the individual vendor, category, SKU and customer levels. This data, coupled with additional model outputs, was used to identify over $4.9 million in short-term savings opportunities.

Tech Tools that Bring the Consumer Into Focus

Best Practices from Kurt Salmons

Q&A With Andrew Zgutowicz

It’s no secret that new technologies are reshaping some of the retail industry’s most fundamental rules for success. Some of the biggest impacts will likely be felt in a retailer’s customer experience strategy as it adapts to emerging technologies, new channels and changing consumer preferences.
Below, Kurt Salmon retail strategist Andrew Zgutowicz answers some of our questions about the potential changes.

Q: Broadly, how should retailers be thinking about technology today?

A: The point is not technology for the sake of technology. Instead, retailers need to focus on how they can use technology to provide a unique and compelling customer experience—consistent with their brand— across multiple channels. Today’s customer is very tech savvy, and she’s using not just one, but multiple technologies, throughout the entire decision cycle. For example, in one of our most recent surveys, we found that 27% of consumers visit their favorite retailer’s website once a week or more, while 50% visit it monthly. That’s a staggering number when you think about it.

[Read more…]

Pricing Pressure: How High Is Too High?

Best Practices from Kurt Salmon

The Robin Report - Pricing PressuresThe industry knows consumer prices will have to rise this year. Now the question is: by how much?

Thanks mostly to a dramatic rise in input costs, retailers are being forced to rework their pricing strategies, shifting focus from permanent markdowns to initial and temporary promotional pricing.

But the current economic landscape—rising commodity and labor costs against a sharply falling dollar, tight credit, sluggish housing markets and cautious consumers—means retailers are particularly wary of passing along any significant price increases to consumers, especially on discretionary items.

The challenge then is how to deliver acceptable margins and stave off competition while still maintaining brand position and retaining core customers. In short, retailers are overhauling the very core of their pricing strategies, asking:

1. Will my customers accept higher retail prices? If so, in which categories and by how much?

Successful retailers will not assume they instinctively know the answers to these questions; instead, they will leverage multiple data sources to determine their customers’ likely attitudes and behaviors toward prices. For example, while it’s a fair assumption that wealthier customers with larger disposable incomes will be less impacted by price increases, retailers catering to this segment can still use data to understand the point at which these customers feel the impact of rising prices and which items create important price impressions on the rest of a retailer’s offerings. These insights can be gained through a combination of focus groups, historic elasticity curves, competitive intelligence, and a deep understanding of each category’s role in the overall assortment and price tests. These price tests may have surprising results—many retailers with whom we’ve worked report conducting selective price increases over the past several months and not one reported a greater-than-expected drop in demand.

[Read more…]

Luxe Redux

The High-End Customer Returns From Exile

Best Practices from Kurt Salmon

As the economy begins to recover, high-end consumers are coming out of their self-imposed shopping hibernation, creating a bright outlook for the luxury segment.

The luxury market is expected to remain strong, according to Kurt Salmon’s Luxury Spending Trajectory. The index, based on multiple measurements of consumer sentiment, is released monthly and provides insight into the following month’s revenue growth in the luxury sector.

Of the luxury consumers surveyed—those in households with annual incomes of $150,000 or greater—42% say they are confident or very confident in the economy, compared to 28% for lower-income consumers.

Luxury consumers have a reason to be confident. High-income consumers appear to be recovering faster from the recession than lower-income consumers and are also less likely to be worried about losing their jobs.

[Read more…]

Easing the Margin Squeeze

Supply Chain Optimization Can Offset Rising Costs

Best Practices from Kurt Salmon

For most of the last two decades, the U.S. retail industry has benefitted from a thriving American consumer economy and a commitment from China to provide low costs. But in the past year, in nearly unprecedented fashion, costs have risen across all components of the retail supply chain. In the past, retailers have protected profits by passing along cost increases to suppliers or, in some cases, even consumers. In the current economy, however, suppliers are less and less willing to take up the slack; and consumers, clearly, are already skittish about spending—even at rock-bottom prices.

[Read more…]