Pricing Gets Technical

Holiday Stationstores uses price optimization software to maximize margins and profit on in-store items

When it comes to in-store profit, finding the perfect price — one that isn't too high that it raises a red flag for consumers, and isn't too low that a store misses out on margin — is key to maintaining the bottom line. Years of experience and expertise on the part of a category manager contribute to success, but it still isn't an exact science. This is where the right technology can make a world of difference.

"We believe most items we sell are not very price sensitive," said Dean Solyntjes, director of pricing and business support at Holiday Stationstores, the Bloomington, Minn.-based operator of more than 400 convenience stores in 10 states. "On the other hand, there are also items that are extremely price sensitive, and many that are somewhere in between. The trick is to understand which is which."

While most retailers have an idea of which items they want to promote and which are more price sensitive, a technology system can bring "discipline into the pricing process," vs. the common practices of reacting to price changes, reacting to competitor price changes or reacting to whether a retailer is hitting sales and margin goals, noted Solyntjes.

"We realized we needed the science of a system in order to understand the price sensitivity of the items we sell, which offers an elasticity of demand calculation," he said. "A system removes some of the emotion that is built into pricing decisions and allows us to develop pricing that is consistent with our view of the strategic role of each category."

Price sensitivity varies by category and item, but some categories like coffee are always price sensitive at any retailer, said Solyntjes. At Holiday, the goal is to be priced competitively on traffic builders. "We utilize the software for most of our categories, and it's really a blend of the art of category management and the rules and science of the system," he explained.

All category managers at the headquarters level utilize the system, including beverage, snack, candy, grocery, general merchandise, foodservice, health and beauty care, frozen food and dairy.

IMPLEMENTING THE SOFTWARE

Holiday Stationstores went live with Revionics' base pricing model in October 2010, but several months of implementation work preceded the launch, including discovery, data integration, strategy definition, system configuration and training. Because Revionics had no previous experience in the c-store space, Solyntjes and other IT (information technology) members worked closely to customize the system where necessary.

"At its start, Revionics was mostly in the grocery store environment. There are a lot of similar characteristics, but there are some differences from the c-store business. We worked closely with them to enhance their system for things liked tiered pricing — for example, if I sell a candy bar for $1.69 or two for $3," he said.

To start the process, Holiday handed over nearly two years worth of data to be integrated into the system, and the process was more intense than originally thought. "Not all data is clean, so you need to devote sufficient resources to the initiative," said Solyntjes.

The Revionics system includes base pricing, promotion, scenario planning, markdowns and reporting, but to date, Holiday is only using the system for base or everyday pricing. Each week, the system creates price change recommendations and category managers review them to determine which price changes to accept. The company set its strategy for pricing in the system before going live, which includes looking at competitive pricing.

"A system removes some of the emotion that is built into pricing decisions and allows us to develop pricing that is consistent with our view of the strategic role of each category." — Dean Solyntjes, Holiday Stationstores

"Aiding their review is analytical detail that provides forecasted results, sales trends and visibility as to why the price change is recommended," Solyntjes said. "There is also the ability to do 'what if' modeling of alternative prices."

Once the price is accepted, the system captures forecasted impacts, and this can be exported so the company can track actual results vs. those forecasted by the system, using an in-house reporting system. But Solyntjes said measurement is still a challenging process.

"It is difficult to determine how a price change may have impacted a substitutable item," he noted. "If you lower a price, you cannibalize other items, and if you increase a price, you transfer sales to other items. The ultimate measure is whether we are hitting our sales and margin targets."

FUTURE PLANS

Overall, Holiday is impressed with the system and the results achieved so far. Solyntjes said the company is on track to achieve the gross profit improvement it anticipated, and will start using the additional functionality available with the system in the future.

"Our category managers are very experienced and data driven, but this system has helped us achieve a new level of discipline to our pricing processes," he said. "We expect to utilize the promotion and scenario planning modules in the near future."

The promotional module will allow the company to see forecasted results of items and prices they may want to run promotions on, while the scenario planning will enable them to see the forecasted impact of a pricing strategy change.

"Utilizing the promotion module would be about testing different products and prices to see what would be most effective," he said. "Scenario planning would be on a broader level to test changes in your pricing strategy or the competitors you are benchmarking against."