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© dunnhumby 20151
HOW PERSONALIZATION IS
CHANGING RETAIL PRICING
And what you can do about it
Howard Langer
© dunnhumby 20152
It’s not for lack of trying, for the signs are everywhere. Seasonal sales.
Coupons. Special offers. Tele...
© dunnhumby 20153
It is important to note that customers are not always
looking for the best price on every item. They are...
© dunnhumby 20154
A SHIFT FROM ‘ALL THE SAME’ TO ‘JUST FOR YOU’
To understand the importance of a shopper like Anne
Parker...
© dunnhumby 20155
THE VALUE OF PERSONALISED OFFERS
AND PRICE PERCEPTION
The Monoprix example demonstrates
an essential pri...
© dunnhumby 20156
LOYALTY IS ABOUT MORE THAN WHAT CUSTOMERS SPEND
If a consumer cares about a brand,
she will be more like...
© dunnhumby 20157
THE SEVEN DRIVERS OF PRICE PERCEPTION
We are only human. Perceptions guide our emotions. And when a floo...
© dunnhumby 20158
Retailers want to ensure that their base
prices are logical to build a sense of trust.
There are often h...
© dunnhumby 20159
When retailers deliver offers tailored to the
individual needs of a loyal customer, the
response rate is...
© dunnhumby 201510
Private-label products can sometimes signal
to consumers that they can get a good value,
even if they u...
© dunnhumby 201511
PUT CUSTOMERS AT
THE CENTER OF PRICE
AND PROMOTIONS
3
Phil Barden, “Decoded: The Science Behind Why We ...
© dunnhumby 201512
THE DUNNHUMBY DIFFERENCE
dunnhumby is the world’s leading customer science company. We
analyse data and...
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Dunnhumby: traditional pricing and promotions practices are not working

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Retailers have a problem: traditional pricing and promotions practices are not working, and it’s all happening at a time when customers have more access to price information—online and via their mobile devices—than ever before.

It’s not for lack of trying, for the signs are everywhere. Seasonal sales. Coupons. Special offers. Television spots. Newspaper inserts. Direct mail. Online ads. Website deals. Social media campaigns. Email interactions. As a group, these efforts fail to produce. Globally, 59% of retail promotions do not break even, according to a Nielsen study. The results are worse in the United States: 71% of promotions do not pay off. When researchers at RSR asked retailers to rate the effectiveness of their pricing programs, 68% said the initiatives were “somewhat effective” or “not effective at all.” Even so, many retailers strive to beat competitors’ prices in a money-losing effort to win customers.

The result is a race down a pricing vortex. And it’s all happening at a time when customers have more access to price information — online and via their mobile devices — than ever before.

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Dunnhumby: traditional pricing and promotions practices are not working

  1. 1. © dunnhumby 20151 HOW PERSONALIZATION IS CHANGING RETAIL PRICING And what you can do about it Howard Langer
  2. 2. © dunnhumby 20152 It’s not for lack of trying, for the signs are everywhere. Seasonal sales. Coupons. Special offers. Television spots. Newspaper inserts. Direct mail. Online ads. Website deals. Social media campaigns. Email interactions. As a group, these efforts fail to produce. Globally, 59 percent of retail promotions do not break even, according to a Nielsen study.1 The results are worse in the United States: 71 percent of promotions do not pay off. When researchers at RSR asked retailers to rate the effectiveness of their pricing programs, 68 percent said the initiatives were “somewhat effective” or “not effective at all.”2 Even so, many retailers strive to beat competitors’ prices in a money-losing effort to win customers. The result is a race down a pricing vortex. And it’s all happening at a time when customers have more access to price information — online and via their mobile devices — than ever before. With retailers’ margins thin, these failures waste valuable corporate resources. Poor forecasting and poor analysis capabilities lead merchants to make decisions based on faulty information and missed opportunities. Many retailers lack clear views into their operations and are still relying on gut feelings to make decisions about pricing and promotions. Their pricing and promotion managers face pressures to follow traditional practices (“This is the way we’ve always done it”). They take in trade promotion funds from consumer package goods suppliers, following these vendors’ suggested promotions without really knowing how they will influence the rest of the business. These conditions typically lead retailers to pursue one of the two most-used pricing tactics: WHERE PRODUCT-FIRST PRICING FAILS Both tactics present problems. They remove the retailer from a position of decision-maker, making them passive imitators. They cause retailers to lose track of why they should even have a pricing and promotions strategy. Along the way, profit margins on certain products disappear as retailers drop prices to keep pace with rivals. And prices on goods that are not the subject of promotions tend to rise so that retailers can maintain gross sales margins on their entire product selection. In short, these tactics are all about “Product-First Pricing”. They reflect retailers’ traditional view that the world revolves around product lines and SKUs and that products “behave” in a certain way. When a retailer lowers some prices and raises others in a seemingly random fashion, customers notice. And they are justifiably confused about what it means. What the retailer stands for in the marketplace. The value it offers to shoppers. Its brand identity. Retailers have a problem: traditional pricing and promotions practices are not working. Follow the vendor. Retailers publish the price a vendor sets, either in conjunction with trade promotion funds or a formula that sets the price at a fixed margin over the product’s cost. Follow the competitor. Retailers blindly match the competitors’ prices without a data-driven strategy about where and when. 1 2 1 “Cracking the Trade Promotion Code,” The Nielsen Company, updated November 6, 2014. http://www.nielsen.com/us/en/insights/news/2014/cracking-the- trade-promotion-code.html 2 RSR Pricing 2015: Learning to Live in a Dynamic, Promotional World.
  3. 3. © dunnhumby 20153 It is important to note that customers are not always looking for the best price on every item. They are looking for the retailer they perceive offers them the most value overall across the store. This makes a coherent price and promotions strategy essential in a marketing landscape where customers are very attuned to market conditions, informed by their peers and influencing each other’s views — and they can exert more control over their shopping experience. Retailers can’t ignore the fact that consumers have seen an explosion in their shopping channel options, and in the power shoppers feel through this range of options including online retailers like Amazon. com and its no-charge deliveries for a membership fee. By embracing a Customer-First price and promotion strategy, a retailer can improve customers’ price perception of its brand — and its business results. Moving from a product-first approach to a customer- first strategy means using insight about customers’ preferences to identify a retailer’s most important and loyal customers and then catering to their needs. Take the example of one model customer, whom we’ll call Anne Parker. Anne is very busy. She looks after her health, has a pet cat and typically shops on Saturday. And while she does not pay attention to product prices, she does look for promotions on items she cares about. Anne Parker does not care about a retailer’s product budgets, or other factors like product uplifts or sales price elasticities. She shops in multiple channels —  in-store, online and via her smartphone. She is PUT IMPORTANT CUSTOMERS FIRST demanding — she wants service and offers that cater to her. And she ignores coupons or emails that are not offering something she needs or wants. Indeed, understanding Anne Parker is the missing link in retail pricing. A retailer needs to know if Anne is a loyal shopper, or if she only buys products on sale. Which products does she care most about getting value from? How many categories does she shop? Anne Parker — and millions like her, with their individual tastes and preferences — define the future of retail price and promotions. Success for a retailer is not about products. Success is about knowing what Anne likes and making it straightforward for her to remain loyal. Success is about knowing whether Anne is valuable to the organisation and knowing whether to over-invest in her. The lack of results from Product-First Pricing and Promotions means it’s time to move away from a product-first approach and adopt a Customer-First pricing and promotions strategy. Working with retailers around the world, we see seven drivers that can elevate customers’ price perception of your brand and inspire loyalty. And we have seen that placing customers at the center of price and promotion strategies yields substantial returns for firms that execute. Success for a retailer is not about products. Success is about knowing what individual customers like and making it straightforward for them to remain loyal.
  4. 4. © dunnhumby 20154 A SHIFT FROM ‘ALL THE SAME’ TO ‘JUST FOR YOU’ To understand the importance of a shopper like Anne Parker, consider three types of pricing and promotions practices — mass, segmented and personalised — and how each practice influences customer behavior. Most retailers are working at the mass pricing level — one price per product for everyone. This exemplifies product- based pricing. The problem is that mass pricing does nothing for a customer like Anne Parker if she does not like the price on a product she needs. And mass promotions may not bring in the customers a retailer wants. Rather, it has the potential to lure one-time shoppers making a special trip to buy goods at discounted prices. Segmented pricing is a step forward from mass pricing. Instead of one price for all, some retailers use segmented pricing to offer a different price to a certain group of customers. For example, a retailer gives a bulk discount for customers who buy large quantities of diet cola, or lower prices to seniors as a corporate social responsibility gesture. The strength of the segmented approach is that a retailer can offer promotions on products that loyal customers care THE POWER OF PERSONALISED PRICING Customers at the Monoprix supermarket can use a loyalty card to receive benefits like discounts on certain products. And in exchange, the retailer collects data about shoppers’ buying habits. By analysing this data, Monoprix can send out quarterly mailings with vouchers tailored to individual customers. The company calls these mailings “snowflakes” because no two are the same. It’s like a matchmaking service between customers and the available offers: The offers match consumers to those items in a pool of promotional offers that Monoprix is making that quarter. For example, promotions for strawberries, soft drinks, yogurt and natural soap may be on the voucher for one customer. A different customer will see a different assortment of offers based on their shopping history. about. If Anne Parker is a repeat customer who cares about cosmetics, a retailer can offer her low prices on cosmetics. Understanding the most important segment of all, customers who are most valuable to you, unlocks the ability to price and promote directly to your most important segment. Whilst the prices you set are available to all your customers, the segment that counts most to you will benefit directly from your understanding of them. Personalised pricing takes segmented pricing a step further. It offers prices and promotions to individual customers on products they like, when they like to receive those offers, and via their preferred communication channel. This is the approach retailers can use to keep customers like Anne Parker coming back to buy. Personalised pricing treats customers as individuals and makes them feel like retailers are paying attention to their needs. The results show the value of this approach. Monoprix sees a participation rate of 50 percent in the quarterly mailing — that is, half of the retailer’s customers have opted in to the company’s loyalty program. The company’s coupons have a redemption rates two to seven times better than typical direct mailings in most markets. This shows that retail customers want offers targeted to them as individuals, when the offer is right. They respond to it. And the practice rewards retailers. Customers want offers targeted to them as individuals, when the offer is right. They respond to it.
  5. 5. © dunnhumby 20155 THE VALUE OF PERSONALISED OFFERS AND PRICE PERCEPTION The Monoprix example demonstrates an essential principle of customer- first price and promotion strategy: the value of price perception. Historically, retailers are accustomed to appealing to everyone who walks in. Personalised price and promotion is different: it distinguishes between customers that are more valuable and those that are less. And it requires investing more in these more valuable customers. While this approach risks losing uncommitted customers, our experience shows that one loyal, valuable customer is worth 12 uncommitted customers. Through the analysis of data about a customer’s purchases, a retailer can paint a portrait of each one, with knowledge of a shopper’s preferences in different product categories. At dunnhumby, we have worked with retailers to analyze more than a dozen of these categories to present a high- resolution portrait of each customer. Suppose that Anne Parker, our model customer, has opted to participate in our loyalty program. The data show that she is more apt to buy fresh produce. She is less likely to buy products labeled as adventurous. She is more likely to buy products offered on a promotion. By analyzing the data related to these and other purchases, a retailer can communicate offers based on these preferences expressed through her buying behavior. Such insights help retailers target areas for growth by designing prices and promotions that will attract loyal customers to buy more based on their preferences. (When customers do not opt-in, a retailer can develop pricing and promotions based on an analysis of anonymised data and targeting different product categories based on general shopping trends.) The analysis of customer loyalty data enables a retailer to identify trends about the brand’s valuable customers — and to make decisions about where to invest pricing and promotions resources. For example, if the most loyal customers are price sensitive, it will pay for the retailer to be competitive on prices for the products these customers care most about. Notably, this approach also enables retailers to decide what not to invest in. There is no need to invest in products that are not subject to loyal customers’ price sensitivity.
  6. 6. © dunnhumby 20156 LOYALTY IS ABOUT MORE THAN WHAT CUSTOMERS SPEND If a consumer cares about a brand, she will be more likely to pay attention to media, marketing messages related to that retail brand in television and online digital advertising. She will be more likely to spend time considering email or direct mail messages she receives. Research about loyal customer sentiments can inform retailers’ pricing and promotions decisions. And analyzing the results of those programs enable a retailer to further refine its strategy. We’ve studied pricing, promotional and loyalty programs, including personalised offers across customer segments, and correlated the data on which customers chose to buy which items. The results identified which price and promotions levers produced the greatest benefits —  but not only in financial terms. Emotional ties to the brand also demonstrate value. The research found that product promotions were most important in terms of financial uplift, followed by personalised offers, the retailer’s pricing program and then fuel. The surveys revealed that fuel provided the most benefit in terms of customer loyalty, followed by pricing programs. These insights show that it would have been a mistake for the retailer to end its fuel program — it had emotional resonance with loyal customers, even if it did not pay off as well. Customers have emotions. It pays to research them and incorporate findings into pricing and promotions analysis. Acting on these insights can deepen your relationship with your most valuable customers, and keep them coming back to your stores. Customers have emotions. It pays to research them and incorporate findings into pricing and promotions analysis. We refer to this as the STEP model. For more on STEP see our ebook “The 4 STEPs of Loyalty: The Evolution of Loyalty Management in a Multichannel Consumer World” on dunnhumby.com.
  7. 7. © dunnhumby 20157 THE SEVEN DRIVERS OF PRICE PERCEPTION We are only human. Perceptions guide our emotions. And when a flood of marketing messages washes over consumers every day, every week, they are unlikely to pay attention — unless a message is relevant and has some emotional resonance. A person will recognise a brand sharing information that is important and relevant to her. It’s a connection with emotional kickback. A retail brand working to stand apart in that ocean of messages can analyse a customer’s preferences and then augment that analysis with research about what matters most to loyal customers. And this combination of insights can guide decisions about price and promotion decisions that demonstrate a customer-first strategy. This is an essential point, given that a typical retailer has tens of thousands of products on offer — and the products don’t move themselves. Retailers have to find ways to connect with customers and elevate their price perception in customers’ minds. PROMOTIONS BASE PRICES STORE FORMAT, LAYOUT, SERVICE LEVELS, RETURN POLICIES ASSORTMENT PRICE PERCEPTION PERSONALISED OFFERS PRIVATE BRANDS MASS COMMUNICATION In working with retailers around the world, dunnhumby has identified seven drivers of price perception. These are actions that retailers can take to enhance how consumers see their offerings. Done well, these actions cement loyal customers’ positive impressions for a brand’s identity.
  8. 8. © dunnhumby 20158 Retailers want to ensure that their base prices are logical to build a sense of trust. There are often hundreds of thousands of products on a retailer’s shelves. In terms of the prices charged, the presentation of these products should make sense to a consumer who visits the store regularly. For example, with volume pricing, the price per unit of a smaller-sized item is higher than a larger item, to incentivize customers to purchase the larger size. All of the prices of different flavors of yogurt are the same. Private-label products that the retailer makes a larger profit on are more favorably priced than national brands. When customers are faced with a pricing logic issue, confusion can erode price perception. Coherence builds it. 1 Logical, trustworthy base prices 2 Purposeful promotions With the right analytics, retailers can determine which promotions to offer on what products. Stress the products that loyal, most valuable customers buy. Avoid promotions on items that are more likely to attract consumers who will visit the store rarely. Customers may visit a retail chain and use the coupons to fill their pantries, or stock up on an item. By analyzing the diversity of goods in a loyal shopper’s basket, retailers can identify whether customers are shopping multiple categories. And they can tell whether customers return frequently, or randomly.
  9. 9. © dunnhumby 20159 When retailers deliver offers tailored to the individual needs of a loyal customer, the response rate is naturally much higher than a generic “one size fits all” promotion. For example, dunnhumby worked with a Korean retailer to create personalised presentations to loyal customers. These customers receive personalised emails. When shopping online or by mobile phone, each customer sees personalised landing pages on the retailer’s ecommerce site, and on the retailer’s mobile app. The retailer updates these offers dynamically, depending on the customer’s shopping profile. Products on offer include those on promotion and those not being promoted — but all are relevant to the individual customer. 3 Personalised offers The assortment of products and their presentation in-store or online influences price perception. The more entry-level price point and private-label product lines available, research shows the better the overall price perception, because customers perceive that the retailer offers a value option. A strong assortment gives a customer multiple choices, at different price points, to make a purchase. Many times we see that results vary by store location depending on the affluence of the customer demographic area. Retailers can then revise their offerings based on this type of data analysis. By varying the assortment of these products in different locations — including separate displays of beer cans and bottles, and offering cider selections according to different flavors — the retailer saw an 11.2 percent sales increase in this product category. The changes in product assortment also correlated to a 5.6 increase in foot traffic through the stores. The same principal applies when selecting which products to shelve and which to discontinue in dunnhumby’s experience. If loyal customers regularly buy products that you would otherwise de-list, consider keeping it to retain them. 4 Tailored product assortment
  10. 10. © dunnhumby 201510 Private-label products can sometimes signal to consumers that they can get a good value, even if they ultimately choose a national brand. One-third of consumers consciously seek out private-label products to save money, and 70 percent of consumers say store brands are a good option when their preferred brand is not on sale and they don’t have a coupon, according to IRI. Yet even though retailers often realize greater margins from their private- label lines, they often haven’t given these products the same pricing and promotional attention. At minimum, consumers expect prices on store brands to be lower — but retailers don’t consistently enforce pricing rules, leading to issues with logic on the shelf. From an assortment perspective, retailers should use the analysis and research into loyal customers to determine which private brands to retain, which to promote and which to de-list. For example, many grocers are offering private-label organic products based on customer demand for what they perceive as healthier options. A retailer also might be able to better see what products fit into a “good-better-best” product tier for their private label lines. The analysis of loyal customer data highlights the outcomes most likely to drive sales to the best customers. Targeted circulars or digital communications are more effective than mass appeals because they are the result of analysis: which personalised offers are likely to be most effective to a certain loyal customer. Retailers can measure the results of these offers to refine a subsequent targeted communication. How goods appear on the shelves, the design of the store’s interior, how a retailer organises the aisles—all of these factors can influence price perception. Analysis of loyal customer shopping data, as well as surveys, can inform the choices that boost price perception. For example, a dunnhumby client recently remodeled a store. The result was positive in some areas, but negative in others. Research showed that price-sensitive customers noticed the hardwood floors and perceived that the goods were more expensive. Even though prices were the same, these customers believed they were paying for the new floors. 5 The value of private brands 6 Targeted Communications 7 The Right Store Format and Layout
  11. 11. © dunnhumby 201511 PUT CUSTOMERS AT THE CENTER OF PRICE AND PROMOTIONS 3 Phil Barden, “Decoded: The Science Behind Why We Buy,” Wiley, 2013. As customers, we think we are in control of our desires. Research has shown that our behavior is subject to external influences. Consumers make 40 to 70 percent of their purchase decisions at the point of sale, with little pre- planning, the behavioral economist Phil Barden has found.3 Such findings make it crucial for retailers to understand the impact of changes in pricing and promotions, and to know what drives their most loyal customers to make decisions. These are the most valuable customers to a retailer. Catering to them brings impressive returns. Customers make 40 to 70 percent of their purchase decisions at the point of sale
  12. 12. © dunnhumby 201512 THE DUNNHUMBY DIFFERENCE dunnhumby is the world’s leading customer science company. We analyse data and apply insights from nearly one billion shoppers across the globe to create personalised customer experiences in digital, mobile, and retail environments. Our strategic process, proprietary insights, and multichannel media capabilities build loyalty with customers to drive competitive advantage and sustained growth for clients. dunnhumby employs over 2,000 experts in offices throughout Europe, Asia, Africa, and the Americas and works with a prestigious group of companies including Tesco, Monoprix, Raley’s, Macy's, Coca-Cola, Procter & Gamble, and PepsiCo. About Howard Langer As head of the Price and Promotion global capability at dunnhumby, Howard oversees strategic and product direction, leveraging experience working with some of the largest retailers in Europe, Asia and the Americas. A former retailer, Howard has spent much of his career delivering price and promotions programs from senior merchandising and marketing roles in the UK, while at the Kingfisher Group, one of the largest retail groups in Europe. Howard is the founder and chair of the Retail Pricing Forum, a UK-based group dedicated to helping retailers improve their price and promotions capabilities. He is a visiting lecturer at both the University of Southampton and Warwick Business School in the UK. LEARN MORE dunnhumby.com/priceandpromotion

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