Creating Efficiencies in Pricing and Promotions: Is Automation the Answer?

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Creating Efficiencies in Pricing and Promotions: Is Automation the Answer?

By Howard Langer - 09/20/2018

The pace and volatility of trading has never been as fast as it is today, and retailers are all too conscious of the need to be quicker and smarter with their decision making. Yet as retail teams face the reality of a smaller workforce, there comes the inevitable questions – how can I do more with less? Where can we streamline?  Automation of processes to accelerate decision making is the obvious answer, yet there is still a lot of resistance and discomfort about moving in this direction. Particularly with pricing and promotions, where retailers often have teams of experts managing this function, there is a political sensitivity around replacing the human element with data science and machine learning capabilities.

But like it or not, automation will be the game changer that enables early adopters to create competitive advantage through their pricing and promotions efficiencies (just look at Amazon and Alibaba). Not just science and retail tech for the big boys, there are opportunities for all retailers to automate elements of their pricing and promotions. Here are four areas where I think we will see the biggest impact:

Price and Promotions Strategy

The inherent problem with strategic planning is that for many retailers the supporting insight is conducted on an infrequent basis, is not data-driven, and is divorced from operations. And how useful is it really if it sits in a static spreadsheet and is looked at once a year? By automating strategic insights such as customer segmentations which customers are most valuable to your business, key value items (which lines do you need to be price competitive on), price and promotion roles for individual SKUs (which products should be ‘everyday low price’) and the right promotional tactics for each product line (how should you be promoting different products), retailers can be more agile with their decision making, and answer the “difficult” questions with the confidence of up-to-date data supporting their insights.

Pricing Operations

Changing prices can be a slow and manual process, often limited to simplistic reactions (e.g. “we’re just going to price-match on these lines”). Many retailers suffer from low-accuracy forecasts and with margins so tight, making wrong pricing decisions can be nothing short of disastrous – both from a financial and reputation perspective. Efficiencies can be created by speeding up the process through automated re-pricing. This could be based on triggers that the retailer chooses (e.g. competitor price changes or cost price changes).

Prescriptive science could also bring new capabilities to pricing teams, avoiding the guesswork about how to price a range of products. Given everything retailers know about price elasticity, halo pricing and cannibalization, using mathematical price optimization to hit financial and customer goals should be a given.

Nothing is static in retailing. The relationship between SKUs changes, customer behavior changes, the market changes. So why aren’t retailers updating their price elasticities every week? There’s no reason why you can’t set smart rules that “autocorrect” prices with market conditions and your business objectives firmly in mind.

Promotional Operations

If any retailer out there has a promotional operation process they are 100% happy with, I’d love to hear from them. Promotions are an enormously time-sapping function, and similar to pricing operations, selecting and executing promotions more often than not involves very manual processes and a lack of quality data. And what chance do you have of running profitable promotions, if you can’t base decisions on meaningful insight?

The promotional operations process also suffers from “too many cooks” as vendors, marketers and merchants all have roles to play which often overlap or even contradict each other. Having a single portal, where vendors put in their deals and there is one set of clear tasks (who is doing what in the promotional process) helps avoid complication and duplication of effort.

Understanding which promotions are not worth running again is also key to creating efficiencies. If you know you’ve promoted a certain product 10 times and it hasn’t given you the desired results 90% of the time that should raise a red flag. Merchants spend 75% of their time working on promotions and with so many offers not generating sustainable profit, all retailers could benefit from a data-driven system which uses automation to “nudge” vendors and merchants away from poor promotions.

Automated promotional science understands the cannibalization between two competing products. It understands when you put a product on a gondola end there are certain rules and constraints, and it can provide a set of promotional recommendations which takes these factors into consideration, to help rebalance your portfolio of personalized offers and mass promotions.

Price and Promotions Data

There’s obvious logic in automating processes, but how many retailers have considered bringing automation into their data capture and validation processes? Poor quality data inhibits learning. It’s impossible to make well-informed decisions if you can’t see the full picture. Having a system which automatically captures 100% of what actually happened during your promotion (e.g. all of your promotion data, on all of the mechanics from in-store, coupon at till, in the flyer, and online) is absolutely essential for optimizing your promotions investment.

So, in my view, if you want to evolve your retail strategy from words in a PowerPoint deck to making all the relevant metrics and KPIs available in software and systems that support better decision making, automation is definitively the answer. And with retail success resting more and more on getting it right the first time, you’ll want to make sure your business is not the one left second-guessing.

Howard Langer is managing director of Price and Promotions for dunnhumby and is responsible for overseeing strategic and product direction and also for leveraging experience working with some of the largest retailers in Europe, Asia and the Americas. He is currently chairman of the Retail Pricing Forum and also a visiting lecturer at the University of Southampton and Warwick Business School.