CSD: Optimizing Everything
By Julie Crawshaw
Through a special arrangement, what follows is an excerpt of a current article from Convenience Store Decisions magazine presented here for discussion.
Though many people equate price optimization with finding the highest price the customer will pay, Ken Ouimet, a pioneer in the field, said the process actually works by lowering margins on some products and raising them on others. Many of his clients, including 7-Eleven, reinvest increased profits in lower prices and use the software to figure out which products, when priced lower, can drive more volume and more market share.
The convenience store channel, he claims, is well suited to PO because it performs best in high-volume environments. Overall payback can come quick.
“When our clients run a pilot program with the software and measure the results against a control group, the result is a 1 percent to 2 percent of sales increase in profit,” said Mr. Ouimet, who sold his company, Khimetrics, to SAP last year. “That’s huge. If you look at a $10 billion retailer, one percent of sales is $100 million a year.”
Jeff Miller, president of Miller Oil Co., said that the KSS PO software he’s been using for the past three years has reduced the amount of time spent pricing gasoline by 50 percent.
“Pricing is something you have to do every day,” said Mr. Miller, who operates 40-plus stores Virginia. “This software gives you the ability to manage prices by site and by grade on a daily basis much more efficiently than you could ever do by hand.”
Dennis Williamson, general manager for Ricker’s Oil, said that before using KSS, his company kept prices the same at the 14 stores near its headquarters in Anderson, Ind. “We were afraid to price differently from one side of town to the other,” he said. “With KSS, on any given day, I now often have five prices and different price spreads as well.”
Mr. Williamson acknowledges that setting parameters for the program can be quite time-consuming. “The software requires setting up a target profit and a target volume that can subsequently be tweaked more toward margin or volume,” he said. “You watch how it reflects to your competitors – you can actually learn that somebody you thought was a competitor isn’t nearly as strong as you believed.”
Most observers agree that PO, which reached retail by helping department stores efficiently clear end-of-season merchandise, has value in determining gas prices because of gasoline’s volatility, but not everyone advocates its use across all items in the convenience channel.
“If you price items significantly less than other stores within line of sight, your competitors will adjust their prices downward and no one will make money,” said RTG management consultant and RetailWire BrainTrust panelist Mark Lilien. “If you price upward, people will simply start shopping at the c-store a block away.”
Jon Hauptman, vice president of Willard Bishop, said c-stores could earn stronger margins and higher profits using PO software to determine prices. However, he added, “Retailers get the full benefits of price optimization only when the system they use supports and enables their own comprehensive pricing strategy. C-store retailers must develop a pricing strategy that provides the guidelines that fuel the optimization engine.”
Discussion Questions: How much of an impact will price optimization software have on convenience store operations? What advice or precautions would you have for a convenience store operator exploring price optimization software?
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7 Comments on "CSD: Optimizing Everything"
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Price optimization software is only as good as the data being used. Does the data cover a whole chain, a region, a store, or a certain group of consumers? Running the numbers is important and provides a tremendous guideline. However, in the final analysis the information needs to fit the consumers coming into your store.
The upside benefit of PO has received very little press. Of course, retailers seldom want to talk about how they are using sophisticated software to get higher prices for goods…not the best PR. Convenience stores would seem an ideal logical fit with the prerequisites for margin enhancement pricing. This works best with impulse purchases, or those where price comparison is either difficult or not worth the effort. Intellectually, this appears a good fit with c-stores.
As a data point of one, I have the belief that c-store prices are already inflated across the board. My concern would not be with the short or medium term profit optimization. I think that would flow as predicted. Rather, I would be concerned with an almost subconscious increase in buyers remorse. I am already unhappy with my perception of the pricing practices. As the prices moved upward, at some level I think the average consumer would be aware. And perhaps without conscious intent, start to shop elsewhere.
I guess it all depends on the software but Dan raises a good point. Gasoline pricing in c-stores is volatile and often keyed off the price set by a targeted competitor. So…if the competitor is irrational, what does the software do?
Pricing optimization is critical to success in the retail environment. However, it is a mixture of costs, which includes all logistics costs as well as product costs. Logistics play a greater role in product sales, since they are often the key component of how a product is priced, and how much of a product is available for delivery (and sale). They also determine the impact that cash flow has on the operations and the ability to financially manage each of the aspects of the logistics and sales cycle towards revenue maximization.