Omni-Channel Pricing Strategies for the 2015 Holiday Season DON DAVIS Editor-in-Chief Internet Retailer SUCHARITA MULPURU Vice President and Principal Analyst Forrester Research GURU HARIHARAN CEO Boomerang Commerce #Holiday2015 @IRwebinars Sponsored by
Let the season begin
A strong 2014 holiday especially online Year-over-year sales growth 100% 50% 0% 3.5% Stores 17% Online Sources: Internet Retailer analysis of National Retail Federation data; Janney Capital Markets
But all kinds of retailers gained online Year-over-year Q4 2014 online sales growth Amazon Web-only retailers All 22.3% 24.5% 25.9% Retail chains 31.2% Source: Internet Retailer, company reports
Store-based retailers led the way online
The deals came early
And it wasn t just the big retailers When will you begin holiday marketing? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 42% 23% 12% 14% 7% 1% June July August September October November Source: ChannelAdvisor, 2014 survey
Free shipping adds to the price pressure 58% of consumers have added items to a shopping cart to quality for free shipping 83% say they would wait longer for delivery if shipping is free 65% of holiday 2014 orders shipped free Source: comscore Inc.
Omni-Channel Pricing Strategies for the 2015 Holiday Season DON DAVIS Editor-in-Chief Internet Retailer SUCHARITA MULPURU Vice President and Principal Analyst Forrester Research GURU HARIHARAN CEO Boomerang Commerce Sponsored by
Pricing Tactics and Strategies Sucharita Mulpuru, VP & Principal Analyst July 2015
Agenda The state of retail pricing now What is legal (or not)? The future of pricing 2015 Forrester Research, Inc. Reproduction Prohibited 12
Agenda The state of retail pricing now What is legal (or not)? The future of pricing 2015 Forrester Research, Inc. Reproduction Prohibited 13
Pricing in different categories Category Grocery Other big box Vertically integrated specialty retail Pricing approach Category captains often set prices Average category markup Price points set by costs of goods and target markup Durable goods Travel industry Brand suggests price (MSRP) Yield management, some elasticity testing
This is the state of pricing right now
Source: Amazon investor presentations Amazon has invested in its flywheel
At any given moment, Amazon wins on price Amazon Walmart.com Other specialty big box Electronics $2,371 $2,546 $2,849 Sports and outdoor products $1,614 $1,769 $1,901 Pet, lawn and garden products $1,226 $1,328 $1,498 Home furnishings $1,092 $1,226 $1,340 Computers and office products $869 $951 $1,049 Entertainment $687 $724 $728 Toys, kids and baby $461 $454 $529 Automotive $319 $342 $347 Tools and home improvement $268 $364 $309 Grocery, health and beauty $135 $ 133 $171 Source: Wells Fargo: The Sputnik Moment for Retail and Forrester Analysis
This was the innovation that put the wind in Amazon s sails
Amazon s marketplace revenue dwarfs its profitability Global net income US$MM Estimated marketplace revenue $12,000 $359 $467 $135 2005 2014 Source: Forrester estimates; GMV=gross merchandise value, the total value paid by shoppers in a transaction
Source: Forrester Research, Tech Radar: Retail Analytics Q4 2014 Dynamic pricing is an opportunity to avoid racing to the bottom
Agenda The state of retail pricing now What is legal (or not)? The future of pricing 2015 Forrester Research, Inc. Reproduction Prohibited 21
Pricing issues tread on antitrust territory Explanation Price fixing Reseller price maintenance Predatory pricing Colluding to set prices; can be a criminal offense Coercing sellers to maintain a fixed price; more manufacturer flexibility following the 2007 Leegin case Explicitly pricing below cost in order to drive out competition; often a manufacturer issue Price discrimination Charging different costs in seemingly similar circumstances to different consumers
Timeline of key milestones in the US 1911 precedent; Dr. Miles Medical cannot enforce reseller prices Fair Trade law allows some state enforcement of predatory pricing to limit retailer cutthroat pricing Dr. Miles ruling overruled in Leegin case; rule of reason applies Early 20 th century Depression-era 60s and 70s 80s Present Colgate Doctrine also say that under certain terms, manufacturers can choose who they sell to and under what terms Congress repeals Fair Trade law, only allows MSRP but debate continues Continued legal support of bans on vertical price fixing, and manufacturers setting prices Source: Wall Street Journal, Price Fixing Makes a Comeback After Supreme Court Ruling, August 18, 2008; Forrester analysis
UPP is now allowed
Agenda The state of retail pricing now The legal landscape (at least in the US) The future of pricing 2015 Forrester Research, Inc. Reproduction Prohibited 25
The long (long) term view More private label merchandise More differentiated store experiences New retailer-manufacturer relationships Greater legal restrictions around web pricing
Manufacturers will likely bifurcate in a competitive, transparent market
Three types of products will be in stores in the future Type of product Characteristics Examples Traditional big box Amazon New paradigm Private label Exclusive items and brands, private label assortment; competitive pricing supported by profit pools Kirkland, Michael Graves Profit center Loss leader (Kindle) Loss leader (modest profit at best) Stand-alone brands Protected brands with UPP power Apple, Dyson, Britax, Nespresso Modest profit (or NA) NA Modest profit Commoditized or substitutable brands Ownership of inventory is pushed to manufacturer; low cost of ownership for retailer; high margins from leased space, or marketplace-type arrangements Magnavox, Graco, Hoover Break even, loss leaders Profit centers Profit centers
In the interim The law favors the ability of a retailer to set price; the most aggressive retailer(s) will therefore set the bar in a world with price transparency/perfect information This is a new phenomenon; manufacturers are just now thinking through their actions Price variability is a reality for the next several years; price matching is table stakes
Thank you Sucharita Mulpuru smulpuru@forrester.com @smulpuru forrester.com
Pricing Strategies & Tactics to deploy this holiday season Dynamic Price Optimization
Sales have increased, profits have suffered due to heavy promotions Retail Holiday Sales ($B) 616.1 558.8 574.9 592.7 533.1 503.8 506.3 2008 2009 2010 2011 2012 2013 2014 Source: National Retail Foundation, US Profits Sales Profits Amazon, though perceived as lowest cost retailer, made record profits during last holiday season 32
Win with sharp, well tested pricing strategies 1 2 Create a price perception of value provider Test & refine multiple pricing strategies Price 3 Optimize for contribution profits rather than gross profits 4 Use private label products to grow profitability Selection Customer Experience 5 Carry complete assortment of popular products in the market 33
1 Improve price perception in advance of holiday season to drive traffic without getting into the trap of heavy promotions Retailer A Retailer B POPULAR PRODUCT heavily underpriced => Improve price perception LESS POPULAR PRODUCTS => Make money on tail item 34
2 Test and Refine Pricing Strategies A brilliant gut is good. Facts are better. Identify headline traffic generating products to spend marketing dollars on by identifying high promo elastic SKUs through test and learn Identify tail/ attach items that have low promo elasticity Do not apply heavy promotions on such items; in fact you could raise prices on such items to make money and capitalize on greater sales of the basket driver/ head items 35
Poll: How many pricing strategies do you test per quarter? None 0-5 5-10 10-50 50+ 36
3 Take advantage of difference in contribution margin across channels to provide value to customers Best seller (hot product) High Elasticity Omni-channel Retailer A $69.99 $59.00 Mobile Only Price $ 55.99 Buy Online Pick up in Store! Dirt Devil Accucharge 15.6V Cordless Bagless Stick Vacuum Transfer contribution margin cost savings i.e. shipping & inventory holding cost to customers Increase store foot falls leading to more attach purchases and incremental revenue 37
4 Test price positioning of private label products vs. top brands - Optimize margins across entire portfolio Private Label Brand 1 Brand 2 $9.99 $15.99 $16.99 $10.99 $14.99 Increased price Increased unit sales 38
4 Portfolio optimization: Maximize value f or the island Filter on a SKU island (e.g. towels) A SKU island consists of all close substitutes a customer will consider before making a purchase decision across sites Test price positioning of private label to optimize for total Island profit Private Label All SKUs Brand 1 Brand 2 Total Island Profits Brand 3 39
5 Surgically identify gaps in assortment -> provide greater selection to customers -> drive revenues and profits Assortment Gap Identification Identify straight gaps in bestseller lists? Retailer A does not Best carry the product seller product on competitors Identify straight gaps in bestseller lists Pre and Post Launch Management Decide on fulfilment mode dropship vs own inventory Negotiate with vendors armed with competitor pricing and sales forecast data Decide on initial pricing based on category competitiveness and hotness index of product Variant that is not so popular on retailer Identify pack mismatch Pack of 6 Best seller product on competitor Pack of 4 Test multiple pricing strategies post live date and optimize to business objectives Analyze effect of introducing the expanded assortment range, and determine the optimal sourcing strategy for onboarding SKUs with superior performance 40
How Boomerang Commerce can help you win this holiday season PPI and real-time competitor monitoring Rapid A/B testing of pricing strategies and game day prep Contribution profit monitoring and maximization Competitive intelligence & price optimization on private label products Assortment optimization based on market trends and popularity 41
Q&A Sucharita Mulpuru VP & Principal Analyst Forrester Research Guru Hariharan CEO Boomerang Commerce 42