1. Classified - Internal use
Innovation in Pricing – Best Practices
The Challenge
How doesa large,multi-channelcompany successfully create aunifiedpricingstrategywithoutthe
expensive price tag? Priortothe unified initiative,pricingwould varyonthe same itemacrossmultiple
channels. Forexample,abox of basicpenswas 9.99 inretail, 14.99 incatalog, and13.99 on the
website. Askingthe three buyers “WHY”generated blankstares,orsometimesthree differentanswers.
Feedbackfromcustomersandexecutives consistently indicated thatthe companyhad little orno pricing
strategy. Thisproveda markeddisadvantage whencomparedto the competition’sattractive pricingin
multiple categories.Key leadership quicklybegancreatingandimplementing changes toreverse this
reality.
The Strategy
Create a pricingstrategythat wouldcrossoverall merchant/buyingteamsinmultiple channels: retail,
online,andcatalogbusinesses. Thisflexible designwouldgrow share,while simultaneously increasing
transactionsandGP$. Thisgoal had to be transparentand robustlysupportedbysubstantial analytics,
accurate ”comp-shop”data,and clearcategorygoals.
Step1
Listeningsessionswithdifferentmerchandisingteams identifiedindividual categoryphilosophies,group
priorities,perceptionsof competitionandtheirsuccessfulmarketstrategies. Careful attentionto these
answerswascritical and wouldhelp secure”buyin”whenitcame time toroll out the new pricing
strategy
Step2
Developthe analyticsand“compshop”data around categories. A limitedbudgetrestrictedthe
purchasingof additional pricingtools. Consequently, new modelswere created internally that
provideddirectional toolsonhowto move pricing. One initiativewastouse the functionof SASpricing
for elasticitemstocreate pricingcurves thatoptimized price forsalesormargin. To combatthe high
riskassociatedwith these elasticitems,the company lookedforadditional dataandused inelasticitems
as a greenlightto move upon price.
Competitive shopdataprovidedalotof insightintocategories. Selectingthe top100 itemsand
shoppingthemweeklyatmaincompetitors helpedinunderstandingthe marketplace. Forinstance,
once-a-monthcomparisonsof company itemsatbigbox stores providedagauge to see whatgaps
existedandclarifiedwhatmoves hadtobe made. Alsomonthly, the company expanded the numbersof
itemsshoppedatmaincompetitors tothe top500 items;thisitemlistwent deeperintothe categories.
Immediately,the opportunitytoknowwhere tomake pricingchangesbecame apparent. If a pack of

2. Classified - Internal use
paperwas 6.99 at a fewcompetitors andthe companywaspricingat 5.99, checkingwiththe buyer
providedan opportunitytomove pricingup.
Thenas categoryreviews were started,the processcontinuedto “compshop”entire categories. This
provided abigpicture insightintoeachcategory andconcurrently allowedforadeepercascadingview
intothe pricingstructure of subcategories.Thisprovided understandingof trade-upstrategiesand
productsubstitutes. A learnedlessonwasthatif youcannotaffordto do a lot of “comp shops”,put
some pressure onyourvendorstohelpyouout.
One keyinsighthere istoshopmultiple competitive storesindifferentregions anddifferentmarket
typessuchas urban or rural,with differentcompetitorsinthe trade area. A good rule of thumbis about
tenstoresper “compshop”-- anythinglessmight resultin notseeingall the prices.
Step3
Testand control are some of the mostpowerful waystodetermineif somethingworksbefore the
pricingchange riskis taken. Withthe internetitisveryeasyto testand control pricesoncertaindays or
times, orzipcodes;withcatalogsit’s more difficultsince anothercatalogrunwithdifferentpricesis
required. Atretail,testandcontrol can be done simply, withthe rightITsetup. Segmentingoutthe
storesisimportant to buildarepresentationof the company’s total chain. Careful review andanalysis
of the velocitygroupsof the chosencategorytested,alongwithtotal store performance and
demographicinformation isimportant. A goodtool called Applied Predictive Technologies,ishelpfulfor
the seriousproblemsolver.
Step4
As pricingchanges roll out,itiscritical to integrate categorymanagementreview processes.The ideal
time to getpricingrightfor the whole category isas “plan-o-grams”are beingreset. It’sa natural time
to insertpricinganalysis;merchantsare determiningwhatitemstocarry,and what theirstrategyneeds
to be goingforward. Timing,of course, isalwayscritical inretail. If the merchanthas justdone a reset
theyare notgoingto want to change prices onthe back end.
Step5
Thisprocessshouldbe replicatedasthe companyexpands itsbusiness.
Innovation
In absence of an expensivepricingtool orsophisticatedanalysiscapability,itisimperativetocreate a
tool setto evaluate all itemsinthe company’s assortment. The company tooka basic4-square model
and expanded ittoa 3x3 grid,definingafew keymeasures. The firstkeymeasure isthe Productivity
Value,athirdof units,addedtoa thirdof marginaddedto a thirdof sales. The nextkeymeasure was
eithernumberof transactionsornumberof accounts buying,dependingonthe channel beinganalyzed.
Once these numberswere calculated,theywere codedasinthe examplebelow:

3. Classified - Internal use
Transactionswere countedanddividedinto threebucketsandcodedaccordingly. The topitems
receivedascore of “10,” the secondgroupwas codeda” 5,” andthe lowestbucketcodeda”1”. This
methodology canbe duplicated againforthe ProductivityValueandscoredthe same way. Addthe
TransactionRank numberandthe ProductivityValue andit providesaTotal Ranknumber. Finally, sort
these numberstoprovide ascheme toconsistentlyevaluateeveryiteminyour assortment. Thisisa
simplifiedapproach,butdoingthisweek overafterweekandmatchingupwhatis on ad whatis not,
providesalargerpicture extendingbeyond justsalesandvolume. Thisdatacan be placed inan Access
database and overtime,the numbersgenerateaclearview of itemseasonalityaddresponse,etc.
Buyersand merchantswill competeoversalesandmargin,andthis dataanalysispullsthose metricsand
providesthe muchlargerpicture.
To discernthe trulytop items,the company’s SuperDestination Items were the top100 itemsfromthe
Total Ranknumberand the our assortments reflected about4,000 itemsperstore.
Description Price Transactions
Transaction
Rank
Units Sales Margin
Productivity
Value
Productivity
Rank
Total
Rank
Ream of Paper 5.99$ 20 10 30 179.70$ 71.88$ 93 10 20
Flash Drive 20.99$ 9 5 11 230.89$ 23.09$ 87 10 15
Desk Lamp 29.99$ 5 5 5 149.95$ 89.97$ 81 10 15
Candy Bar 0.99$ 10 10 12 11.88$ 9.50$ 11 1 11
20oz Soda 1.49$ 15 10 20 29.80$ 26.82$ 25 1 11
Music CD 14.99$ 9 5 9 134.91$ 40.47$ 61 5 10
Pack of Pens 10.99$ 2 1 10 109.90$ 43.96$ 54 5 6
Extension Cord 15.99$ 1 1 4 63.96$ 19.19$ 29 5 6
Spray Bottle 4.99$ 3 1 3 14.97$ 5.99$ 8 1 2

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The Results:Yearone was arounda six milliondollarmarginimprovementoverprior. Inyeartwo there
was a 100 basispointimprovementinthe retail business.
The company hiredpricinganalysts tosharpen the category ManagementReview process andsolidifyits
consistency. Price analysistrainingwasinitiatedsothe categorymanagement staff couldall be onboard
withcleargoals.
KeyLessons

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Remembertogive credittosuccessful initiativesandbe generouswithprovenstrategies. Consistency
inregularprocessreviewiscritical such as monthlystatusupdates, graphswithtestandcontrol results,
numberof price pointschangedovera category and Nielsenshare gainsif itapplies.
Buildsoftskillsandencourage good relationshipswithmerchantteamssothatno one is surprisedwhen
changesare made. If there are certainteamsmore openandreceptive tochanges,thenuse thisasa
startingsetand start withyourbestcustomers. Relyondata, but don’tletitsolelydrive resultsasthe
companybeginsnewpractices. 1st
thingto testand control lowerelasticityitems,itisaneasywinand
youcan getto the riskieritems later. Buildingsolidrelationshipswillgarnerstrongergains asyoubegin
the process, realize asuccessful reputationandbe proudof the growththat will result.