Posted 12. 06. 2019
After the last year’s burning discussion about price promotions this year's Retail in Detail series brought another hot topic: Strategic Pricing. More than 120 participants gathered in the conference hall in Prague's Brumlovka to discuss how to make smart pricing.
The key contributions of the day came out with the following conclusion to the current market situation: we are too bound by rules and old pricing models. “Pricing is very rigid, and stuck here. Individual teams within a company do not communicate with each other and at the same time everyone wants to have control over decision-making,” said Jonathan Smith, a member of the Yieldigo advisory board, who also had led Marks & Spencer in Central Europe for three years. "Retailers would take a huge leap forward if they took courage and implement available digital technology tools. Let's be honest, the customer experience here is very poor,” Smith said. In his introductory speech, he also highlighted the importance of HR aspect in corporate governance, i.e to look after employees better, and to incorporate it into the company DNA. Then pricing will cease to be the alpha and omega and the biggest pain at the same time.
Satisfied employees are undoubtedly involved in the overall customer experience. According to Michal Horáček, Cloud Solution Specialist from Microsoft, by the next year CX will be the most important point to distinguish you from your competitors. And whoever keeps trying to do it without digital technologies will not take his breath anymore. In addition to homogenous greyness prevailing in access to prizes and price promotions, the biggest grocery chains had become predictable in their six-week promotional cycles, as was proved by Petr Miklík from the sales aggregator Kupi.cz. The change is necessary also in overall approach to pricing within companies. As Marek Hallér, CMO of Rohlik.cz, says, the pricing department should not be subordinate to marketing or other teams.
No technology, no chance
But the opposite perspective says that pricing as an autonomous company department will not be needed in the future. Technology will help instead. Michal Horáček from Microsoft introduced Power BI, the tool which, after entering a wide range of input data, including location of stores, on-line traffic or meteorological data, assesses why business goals are not being met at a particular store. Yieldigo, a young technological start-up using algorithms, proposes pricing and promotional models based on whether the goal is to raise profit, or volume etc. "Old perspective works only with price index and competition, I know people still counting on a calculator or using Excel as a main tool. It is very important to change the way of thinking and to know what I want from pricing. Then artificial intelligence can calculate how I should do it,” Milan Havlíček, the Yieldigo Sales Director, explained the augmented pricing principle. As Marek Hallér of Rohlik.cz sighed earlier that day, no local retailer can work with regional pricing. Havlíček added that, according to their experience, with the right approach, regional pricing focus can yield 1 to 3 percent of extra profits.
Robotics not only in retail, but also in production and logistics will also contribute to cost optimization and thus to pricing. Marian Šramko, Sales Director at Zebra Technologies Europe, introduced the vision of the upcoming years. Artificial intelligence is based on the ability to teach robots to see, navigate and move in space, evaluate what actions to take and then implement the results. As soon as these technologies (machine vision, machine learning, location tracking, and robotic motion planning) are be commercially available in the near future, the next biggest player's competitive fight will begin. Nowadays, so-called co-bots, i.e robots which act as assistants for data collection, movement of goods, etc., already move in stores or warehouses.
During the first part of the conference program a lot of numbers were presented, not always flattering. Michal Čepek from the Nielsen research agency showed how important it is to know the product price elasticity. Regardless of the economic conjuncture, the promotional share again increased to 56 % last year, which is why the market is highly concentrated, resulting in 1 % of products account for 34 % of turnover. Opportunities for profit are to find products that are inelastic and at the same time priced too low, while elastic products that are too expensive bear the potential to increasing sales. A model example of an anonymous chain revealed that 33 % of its products were too cheap, another 35 % were too expensive, and for a selected product X with a price of 27.90 CZK and a competition price of 29.90 CZK, with a price index of 93 %, the price elasticity being worth -0.85 affects a turnover of CZK 74,585 and a profit of CZK 100,000.
Another example presented as operating costs were saved by the cooperation of VKF Renzel and Tchibo. Martin Rösler from VFK Renzel explained the old Tchibo staff work routine: as a quarter of the assortment changed on a weekly basis, the use of paper price tags had made the staff of the stores considerably busy. Electronic price tags had brought significant savings in time and certainty of the same information on the shelves and in the cash register system.
A case study on the last year's launch of a new Republica rum presented by Tomáš Hejkal, CMO, STOCK Plzeň – Božkov showed how the appropriate positioning of a new product can help the whole category. The growing category of premium rums, which are not used for mixology, had determined what direction the new product should take. A Caribbean rums blend, a half-litter package, an introductory price of around CZK 250 and, of course, a massive 360° support at the point of sale, on-trade as well as special events and festivals, all that helped to increase the rum category by almost 50 %. “People ask us why we do not want more money for a premium product with such an image, but it would contradict the overall communication and brand strategy of Božkov brands, which claims we don’t pretend who we are. We have come to the conclusion that even if the label proclaimed that it is an old rums blend, which is true, consumers would be suspicious of it,” Hejkal explained. The goal was to reach especially Božkov's customers i.e main stream and lower middle class.
Lessons from France
In recent years even in our market, there has been risen occasional ideas to limit the highest food promotional level by law. Opponents, which so far seem to be the majority, mean that the state should not interfere with market issues of this type at all. François Acca, an ECR consultant in France, showed what impact this could have. Since February, 2019 a law that sets the upper limit of the promotion in the food industry on 34 % has been effective in France , and the total amount of promotions must not exceed 25 %. Also it is not allowed to use “for free” or “free” expressions for 2 + 1 promotions any more. The French market has been struggling with decreasing volume and farmers facing loss caused by big chains and their price wars. In this situation the initial effort was to reach sustainable consumption and fair prices for farmers and small producers. With this, an obligation of at least 10 % margin for traders is also needed to increase the price spectrum and de facto subsidize farmers and the smallest suppliers. For last four months prices have decreased for 1.7 % to 23.7 %, and non-food products from the FMCG category with the average discount increased by 0, 7 % to 36.4 %. In two years, the French government will evaluate the law impact but it has been already clear that retailers have moved price pressure to another product categories.
The discussion of Petr Bena of Alza, the owner of pharmacy.cz Vladimír Finsterle, the director of the Tchibo chain Tomáš Zahradník and Tomáš Formánek from Logio, that followed the main program, brought a clear agreement that any state intervention in market matters is not desirable.
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Tomáš Krásný, Partner
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