Perspectives

A measured approach to retail growth

Why retailers should implement a culture of scientific measurement

​Pricing challenges and intense competition in retail markets have only increased in the emerging age of omnichannel retail and price transparency. To be successful in these conditions, pricing strategy needs to become more creative, differentiated, and based in a scientific test and measurement approach.

Pricing strategies should become more creative and differentiated

​Retailers have long sought to improve sales by tinkering with all aspects of layout, product selection, and price. With regards to pricing, effective strategies seem to be an elusive, constantly moving target. Headlines are continually peppered with retailers announcing new—often reactive—pricing, aimed to capture customers and fend off competitors. At times these changes are nuanced, as we see in the retail industry, where companies (apparel retailers, for example) seek to simply refine their high-low, promotional-based approach. In other cases, we see larger strategic shifts—such as the move to everyday low pricing (EDLP) among many general merchandise, grocery, or home improvement retailers. Then, of course, there are massive strategic realignments, some of which have resulted in turmoil and disaster—as we have seen in recent years.

These changes have only accelerated in the age of omnichannel retail and price transparency. Now, pricing strategies should become even more creative and differentiated, as blunt tools such as the “price match” have an uncertain history of success. In light of this constant change, how should retailers decide what path to pursue?

This article previously appeared in the May 2015 edition of The Pricing Advisortm, a monthly newsletter published by the Professional Pricing Society.

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Testing and measuring in the world of retail pricing

Scientific approaches to understanding customers, such as Paco Underhill’s pioneering work in Why We Buy, provide a path forward by recommending experimentation and a scientific approach: trying out new ideas to constantly improve.1 More recently, articles have reinforced the importance of effective experimentation in all aspects of business.2 However, there is still an opportunity to directly apply the principles of testing and measuring in the world of retail pricing. Despite the best intentions, experimentation among retailers is still characterized by a limited scope or a narrow view of success. For instance, small scale periodic testing may fail to shed insight on the breadth of opportunities available. Elsewhere, scorecards and key performance indicators (KPIs) rely on approaches such as year-over-year or “same store sales,” which can misrepresent the real impact of a test when exogenous changes such as the economy come into play.

Whether seeking to refine their current course, completely shift strategies, or introduce creative pricing offerings, we recommend retailers focus on establishing a culture of scientific measurement, allowing them to “test their way forward” to pricing success. This goes beyond running a single test. The organizations we have seen succeed have committed to testing multiple opportunities and rigorously measuring success through a “test” and “control” methodology.

1.Underhill, Paco. Why We Buy. Simon & Schuster. 1999.
2.Thomke, Stefan and Manzi, Jim. “The Discipline of Business Experimentation.” Harvard Business Review. 2014.

What we mean by rigorous measurement

Some retailers feel they already measure by tracking common metrics like same store sales. The unfortunate truth is that these metrics are not built to accurately assess the impact of a pilot price test. Broad measures such as year-over-year sales often fail to account for external or unrelated factors that may have influenced sales during the pilot.

To accurately measure the impact of a pilot pricing program, we recommend utilizing a test and control methodology. Test and control is used in scientific experiments to find out the answer to the “what if” question. In Back to the Future, Marty McFly travels back in time and finds out (spoiler alert!) what would happen if his parents had never met. We can apply the same methodology in retail pricing to ask the question, “what if?” To know the impact of a pilot program, we compare what happened in the “test” stores vis-à-vis the “control” stores where the pilot was not in effect. For instance, if a store had a promotion during a given week, how much more did it sell than a store without the promotion?

Retailers can learn from peers in other industries. Internet and technology companies commonly use “A/B testing” where visitors to a website see different pages (note: this methodology is also used among online retailers). The technology company uses differences in behavior to improve user experience and click-through rates. Financial institutions often employ “champion-challenger” schemes, where the newest innovation is tested on a randomly selected cohort to evaluate the program. One of the most rigorous applications is in the pharmaceutical industry, which has to meet the stringent requirements of the FDA via test and control.
 

Test, learn, and adapt

We challenge retailers to take a more thoughtful, scientific approach to testing and measurement. This begins by building a culture of measurement. In the more advanced retailers, this culture manifests in a commitment to “getting things right” up front, a thirst for details, and the patience necessary to methodically evaluate operational tests before moving forward. Once this culture is in place, retailers must focus on crafting experimental design and building a repeatable process to measure accurately. This design is even more important in the world of big data, where retailers collect terabytes of data on stores and customers every day. With a little analysis and planning, the data can be put to work effectively. Finally, rather than measuring success through a single metric, we challenge retailers to pay careful attention to the definition of success.

Though establishing a data-driven culture of measurement is no easy task, retailers—such as the one highlighted below—who choose this path may have the opportunity to fully capitalize on winning pricing strategies. After all, as Edward Deming once said, “In God We Trust. All others bring data.”

​Once a retailer has firmly established a culture of measurement, it can be leveraged for dozens of applications, ranging from pricing, discounts, human resources, training, distribution, and other operational areas.

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