The 10 Building Blocks of an Integrated Pricing-Promotion Strategy

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1 COMPETITIVE EDGE By Jon Hauptman February 2014 The 10 Building Blocks of an Integrated Pricing-Promotion Strategy WillardBishop.com

2 Retailers, in their continual quest to ease eroding margins, often turn to price to differentiate their banners. In fact, price has become the single-most important element in connecting value to their brand s identity. Regardless of retail platform (Hi-Lo or Hybrid EDLP), price stands as king when it comes to attracting new shoppers and increasing loyalty. Yet many retailers are not getting the full bang for their pricing buck because price is managed separately from promotion. An integrated, optimized price strategy requires a keen understanding of the symbiotic relationship between base pricing and promotional pricing. Establishing the Pricing-Promotion Relationship Determining the high-level role that base pricing and promotional pricing play is one of the most important strategic decisions any retailer will make this year. Many are opting for a hybrid-edlp (everyday low price) strategy in which they plan to place less emphasis on weekly ads/promotions than they did in the past and in turn focus more of their pricing investment in sharpening their everyday base prices. Alternatively, some retailers are intent on establishing a competitive advantage with an aggressive high-low strategy in which they invest heavily in weekly promotions to drive traffic.

3 The 10 Building Blocks for Developing an Integrated Pricing-Promotion Strategy As we all know, no serious relationship can flourish if each party is consistently acting independently, with no regard for the other s needs and expectations. In the old world of retail pricing, base prices were managed by a single merchant or pricing director, while promotional prices were determined by category managers responsible for each product area. Periodically, these individuals may have talked about the general role of base pricing and promotions; however, the day-to-day decisions were typically relegated to their own goals and objectives. Today, the optimal path to success requires retailers to adopt a fully integrated approach to base pricing and promotional pricing. A proven, highly effective process for developing such a plan is to follow the 10 building blocks summarized below. 1. Isolate your current price position First you ll need to uncover your price position at all levels, i.e., by zone, total store, department, category and item. A weighted indexing method is considered a best practice and it s imperative to calculate the indices for base prices alone and with promotions included. 2. Determine your desired end game Once you know your price position, determine your desired price position (end game) as well as the high-level path you d like to take to get there, e.g., hybrid-edlp strategy, high-low strategy, etc. 3. Commit to your path/strategy Whether you select a hybrid-edlp, high-low or other strategy, the organization must commit to following the strategy, even though there will likely be uncomfortable and rocky times in the beginning. For example, any retailer that chooses to rely less on weekly promotions in favor of lower base prices may see a short-term reduction in sales as shoppers recalibrate their expectations and get used to the new value-driven shopping environment. However, the long term objective is to encourage patrons to shop the store more intensively on every trip, so patience is required until shopper behavior shifts noticeably.

4 Retailers must effectively manage their mix of everyday base prices along with their portfolio of weekly ad deals and their TPRs. 4. Establish/validate category roles Establishing roles and corresponding marketing intents for each category across the store will help guide appropriate base and promotional pricing. Category roles can include: signature, destination, routine, occasional/seasonal, convenience Corresponding marketing intents indicate how the category role will be applied, i.e., for: traffic-building, transaction/basket-building, profit-generating, image-enhancing If you do not have category roles, we recommend that you establish them, understanding that a balanced portfolio of roles just like a balanced investment portfolio must have representatives in each group. If you already have category roles, now might be a good time to revisit and update them. Building the category role portfolio should include analyses of POS data overtime to isolate current performance and trends, syndicated market data to determine what s being sold outside your stores, and category manager experience/insights. 5. Budget promotional spending Once the overall strategic direction has been set and category roles established, it is time to develop a budget model for promotional spending. This will identify how much is appropriate to invest in promotions for each category, depending on category role, current price position, high-level approach to the base-promotional price mix, etc. The model can break down these category-level investments by period, thereby helping category managers determine the needed or maximum level of investment for their category each week and period. The model will also ensure that the organization does not unintentionally over- or under-invest in promotions to support the category s price position. 6. Apply shopper behavior Retailers may choose to target disproportionate or special promotional spending to select stores or segments of shoppers based on their behavior. Retailers can harness the power of loyalty data (or tlog data for retailers without loyalty programs) to segment shoppers, e.g., top-spending households, price-sensitive households, etc., and then be ready to deploy part of the budgeted promotional spending on a targeted basis as appropriate.

5 7. Set pricing guidelines and rules To ensure that base pricing and promotional pricing complement each other in every category, retailers need to establish comprehensive guidelines, rule-sets and constraints for setting appropriate and responsible base prices and promotional prices in every category. 8. Support your strategy with technology Advanced pricing technology such as price optimization and promotion optimization systems are great tools when effectively guided by the retailer s pricepromotional strategy. Unguided, these systems become black boxes that can churn out price-points without regard to the retailer s strategy. However, when populated with the retailer s base and promotional pricing guidelines, rule-sets and constraints, these systems can effectively automate and institutionalize the strategies and help the retailer isolate appropriate base and promotional prices. It s not reasonable to expect a single system to provide the best base pricing and promotional pricing support. Traditional price optimization systems and rules-based pricing systems can be used to identify the best base prices corresponding to the pricingpromotional strategy for each category and item. However, promotional pricing needs are different than base pricing needs, and best-in-class retailers are adopting separate promotion optimization systems singularly dedicated to, and focused on, promotional pricing that complement their base pricing systems and provide useful, appropriate guidance for setting promotional prices. One of these promotional optimization systems, AD-IN, offered by Willard Bishop and Prognos, identifies the expected performance of a vendor s proposed deal, and then isolates a better/optimal variation of that deal (e.g., different promotional price) that will yield a better result, across an entire weekly ad or group of TPRs. The key is that two systems can work well and complement each other if guided by the retailer s high-level pricing-promotional strategy and detailed base pricing and promotional pricing guidelines. 9. Communication is key (See last page for more on AD-IN ) All base and promotional pricing efforts are meaningless if you do not effectively communicate your pricing-promotion offering to your shoppers, both inside the store and outside the store, e.g., online, via social media, etc. You ll need to establish a pricevalue theme and then support them via a wide variety of vehicles such as signage, shelf tags, , social media, etc. Such communication will educate shoppers about how they can work the system in your stores and capture great prices and value, and it will help you highlight the availability of your best values so they re not unintentionally missed. 10. Measure and adjust Establishing and managing a new pricing-promotional strategy is not a one-time initiative. Instead, retailers must continually monitor, measure and evaluate the effectiveness of each element of the strategy, adjust those components that need it and communicate the benefits earned to all your team members to ensure ongoing buy-in and acceptance.

6 Retailers deploying an integrated pricing and promotion strategy based on these 10 building blocks will improve their competitive position by: Capturing full credit for great values offered while enhancing their price-value image Driving profitable sales growth in a responsible, sustainable manner Strengthening the ROI (return on investment) associated with their promotional activities To learn more about the value of an integrated pricing and promotion strategy, please contact me at or jon.hauptman@willardbishop.com. About the Author Jon Hauptman Partner Jon, a widely recognized pricing expert and retail strategist, leads the Willard Bishop retail services practice. In addition to developing innovative retail services and solutions, Jon is an accomplished speaker and frequently serves as a guest panelist for the retail industry. Jon is also featured regularly in major media venues such as The Wall Street Journal, USA Today and National Public Radio. Prior to joining Willard Bishop, Jon served in marketing roles with United Airlines and Dominick s Finer Foods. Jon holds an M.B.A. from the University of Chicago. Want Willard Bishop to address a specific retail or CPG issue in an upcoming Competitive Edge? If so, send a request to jeff.rice@willardbishop.com stating your challenges, issues or ideas. The Willard Bishop editorial staff will review all submissions and notify you if your topic is selected. This document may be shared freely. Copyright Willard Bishop, All rights reserved.

7 P R O D U C T S Willard Bishop, with nearly 40 years of experience in consumer packaged goods (CPG) and food retailing, has earned the reputation as the industry s preeminent consulting firm. The company s rich history is steeped in delivering high-impact, high-value solutions across the CPG value chain. Today, Willard Bishop continues to enhance the performance of its clients by using advanced analytics and superior insights to create game-changing outcomes. Willard Bishop provides a solution matrix that combines expert knowledge and insight with custom-developed applications and tools to improve client performance from concept to consumer. AD-IN Where Promotion Meets Profit AD-IN, developed by Willard Bishop and Prognos, is the first promotion productivity tool that optimizes the collective performance of retailer s circulars and TPRs in order to gain margin and increase visits. The Total Store SuperStudy for the supermarket channel, is a product performance benchmarking tool, created using 52 weeks of performance data from top retailers in the U.S. SuperStudy subscribers use this proprietary, aggregate data (available at total store, department, category, and brand levels) to make better decisions based on key financial metrics, including cost of goods, trade monies, margins, unit volume, profitability, ROI and other financial performance measures. Willard Bishop practice areas include: Activity Based Costing Localization Strategies ecommerce Collaborative Performance Retail Pricing/Promotion Shopper Relevancy Channel Development Product Positioning The Convenience Store SuperStudy is a benchmarking and basket analysis tool used to improve decision making, and for developing fact-based performance initiatives. The 2014 SuperStudy includes all key packaged goods and food service categories, as well as subcategories, across three leading convenience store chains. 840 South Northwest Highway Barrington, Illinois Fax WillardBishop.com The Willard Bishop Localization Study The Localization Study is comprised of 60 million shoppers across select retailers in 25 states. The study is used by retailers and manufacturers to extract actionable insights from the study s transactional data, which spans 1400 stores over a 104 week period. Subscribers use the Localization Study to analyze category performance, customer behavior, and merchandising effectiveness.