NEW YORK -- Think of price optimization as flying an airplane, said Bob Johnson, executive advisor for KSS and a former general manager, gasoline and environmental sciences, for 7-Eleven Inc. The sooner that we find out we're off course, the smaller the correction we need to make to achieve our objectives, he told attendees of Tuesday's CSPNetwork CyberConference, Pricing Right.
Sponsored by KSS, a Florham Park, N.J.-based provider of pricing applications for the petroleum and c-store, chain drug and grocery channels, the event provided nearly three [image-nocss] dozen attendees with the basics behind price-optimization software.
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KSS' price optimization products include PriceStrat, an application that manages in-store pricing, and PriceNet, which offers control at the fuel island. Both products are based on the concept that knowledge is power.
Lyle Walker, KSS vice president of global marketing, explained that many retailers today base their in-store pricing decisions on historical methods: working off of an average gross margin, using magic price points such as 99 cents or two for $1, and their own pricing traditions. Price-optimization software enables a retailer to challenge these conventions by constructing what-if scenarios that play with different price points, products and categories.
So for example, upon performing an analysis of customer buying behavior and different pricing scenarios, one of KSS' PriceStrat customers was able to eliminate a SKU of bottled water from the cooler after discovering that customers were more loyal to price than brand.
Similarly, optimization software allows retailers to better understand the dynamics of fuel pricing, including what effect a price change on an individual fuel grade has on the volume of the other grades, which competitors are taking the most volume and how customer driving patterns should shape daily pricing strategy.
In a period of high volatility, such control is especially helpful, said Johnson, to smooth out the peaks and valleys and attempt to manage both volume and margin to achieve our target objective. He noted that 7-Elevena KSS customerattributed proactive gasoline pricing to strong third-quarter volume and margins.
However, although optimization software can provide a significant returnor a minimum of 0.25 cents per gallon in extra fuel margin and a 4% to 6% increase in store profitsit does not replace the art of pricing, Walker said. Rather, it complements a retailer's internal skill set by bringing consistency to the pricing process.
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