The promise of big data is alluring, but partnering it with great analytics alone is not enough to deliver the insight that businesses need, particularly in the complex area of pricing and margin optimisation. But the pressure to move quickly is strong as companies worry about competitors already finding insights and making advances. Data-driven insights can create value across the business, helping managers tailor assortments at the store level, simultaneously enhancing the customer experience and improving unit economics, but it has to be done methodically.
A handful of companies have pushed ahead and gained clear advantages. Using just one or two levers, some are boosting sales by 1 to 3% and margins by 100 to 500 basis points—a significant improvement for many retailers. Using multiple levers across the organisation could improve revenue growth by 2 to 7% and profit by 10 to 20%.
Retailers have always struggled with operating at scale, and many are struggling now to embed insight-driven approaches across their organisations. Inertia is a fact of life in every large organisation, from government agencies to sports leagues, and retailers are no different. As the pace of change increases and the marketplace becomes more complex and competitive, merchandising and marketing teams may not feel they have the time to learn new approaches or master complicated new tools—even if they recognise the value.
Without a major change-management effort, most people will keep thinking, planning and executing in the same ways. The right people with the right mix of analytical and business experience need to be on board to use much more rigorous decision-making processes, standardise processes across categories and geographies, and synchronise efforts across the organisation. Superior data management is essential to providing refreshed and regular insights, and powerful tools need to be available that don’t require an advanced computer science degree to use.
Transformation on this scale is difficult and takes time. The “chain to impact” includes both human and organisational factors such as people and process, as well as technical enablers including data, solutions and advanced insights. A typical transformation effort has a roughly 30% chance of achieving the targets set by the company. But companies who commit to using an evidence-based approach, building the right analytical team, and leveraging the latest insights and solution breakthroughs succeed with transformation efforts 90% of the time.
Here are five top tips to help ensure improved pricing and margin optimization:
Remember: It's a journey not a trip
Given the complexity and variety of activities in the retail business, companies can’t move quickly to where they want to be. They increase their chances of success by taking small measured steps, each big enough to make a difference in performance but small enough to be embedded and scaled within the organisation. Changes that are too small won’t move the needle on performance, and changes that are too big won’t stick. In addition, companies should commit to a strategic roadmap of how they will embed analytics, insights and actions into their organization and the organization should be educated and committed to this vision.A company that commits to improving pricing each year, for example, can begin by asking what steps it can take this quarter and next.
That said, senior management should look beyond pricing or promotions toward broad revenue management, which will mean changing the way they run the business and becoming more insight-driven at scale.
Leaders should consider all of the constituents required to drive their strategy, including organisational elements, such as staff capabilities and best-in-class processes along with technical elements, such as data management, analytics and software systems. This holistic approach across people, process, and technology generates significant impact, including better decisions on promotional activities and trade investment, and sustainable change within the organisation.
Get the people on board
It is easy, and potentially also dangerous, to focus on the short-term benefit or impact of change, yet the change process is often long and interlinked. The right people need to be in the right seats on the right bus going in the right direction. This may mean hiring in additional talent, moving people into a more efficient structure, or even aligning the organisation to the strategy. It should also be noted that hiring outstanding candidates is intensive and must be done with rigor and focus.
Move to decision-based data management
It’s human nature to look at the information in front of us for clues. But most retailers do better if they first define the kinds of decisions they want to improve and then look for data that can inform those choices. Selecting improvement areas can also help managers structure the data, decide where accuracy is paramount, and determine whether to buy software or build it from scratch.
For example, data-driven insights can often help make promotional spending more efficient. But what kinds of decisions does the company need to improve? How are targeted customer segments responding to the promotions? What behaviour is the retailer trying to incentivise? How big should discounts be? What time of year or in which geographies to offer a discount? Where to mail coupons or circulars? Each decision requires distinctly different data and analyses.
Choose the right solution
In choosing or designing tools, retailers should look for an easy-to-use solution that can improve performance with insights the merchants and analytics team understand. More sophisticated tools can be useful for expert users, but if a typical end user doesn’t understand the insights behind the tools, the investments may be wasted and adoption slow. Our experience has shown us that the best tools offer sophisticated insights but are intuitive (and almost fun) to use. The software also has to be flexible enough to keep providing useful insights as the marketplace changes. Some early rules-based systems were built on the assumption that the single overriding goal was optimizing for profit, but profit is rarely the only goal of a well-conceived strategy.
Change mindsets and behaviors
Successful transformations typically begin with a “coalition of the willing” who are prepared to show the way. These leaders help form dedicated teams who begin documenting processes. The revenue management team should be the foundation, and experts help teams improve core revenue management processes and guide the evolution of a flexible and expanding set of databases and tools. Experts “teach the art,” and employees throughout the organization receive training.
It is a multi-year journey to insight-driven leadership that can present many challenges along the way. The rewards of success—and the costs of falling short—are enormous. Retailers need to start down that path now to keep pace with their competition in a marketplace that is revolutionising itself with incredible speed.