Understanding if you have a Pricing Problem

When we engage with retail prospects for our services, the first thing I usually ask is, “Are you setting prices in a spreadsheet?”  If the answer is yes, likely you are experiencing challenges with your ERP or Host Merchandising system that were insurmountable and lead you to externalizing price setting through a spreadsheet.  Often it is not just a single spreadsheet, but many spreadsheets that must work in unison to deliver prices.

Spreadsheets aren’t the only cause of pricing problems.  In one case, we saw a retailer that has an optimization tool, but can’t reliably get prices down to stores.  This is a price execution problem rather than price setting.  Regardless of the reason, prices have to be set and sent to where customers can see them and problems can arise along the way that ultimately impact your profit.

If you suspect you might have pricing problems, how do you find out?  We typically start analyzing where errors are the most obvious.  At the highest level, commercial companies sell products for a price, customers buy the products, and you can check if the price for which you sold the product is the same as what you expected.  The specific points where errors occur differs by industry but for retail, you can typically start with:

  • Store operations. Store operations will typically be notified by sales associates when prices are wrong.  Track how many wrong prices are reported per week and which stores have errors.
  • Take a sample of orders and re-price them.  A random sample will give you an indicator of if there are pricing errors.

You can then quantify the financial impact of the price errors.  Products can be overpriced or underpriced and you can calculate the difference from the actual price.  If it is overpriced you risk losing a sale. You can also undermine customer satisfaction but that is tougher to quantify.  An underpriced product will impact profit and is easily calculated.  Secondly, when you identify pricing errors it takes time and effort to correct the price.  This has a cost in that an employee must analyze the error, correct it and move it through the systems to eCommerce or the POS.  For example, you can review the analysis from the metals company we worked with years ago.  Even though it has been 15 years, many companies still manually set prices in spreadsheets and experience similar error rates.

Once you realize how much price errors cost, you can figure out how to correct them by reviewing the process.  The metals producer mentioned above found they had a 5% error rate on all invoices.  This error rate is not uncommon when there are manual steps involved.  They analyzed the process from start to finish.  We used a similar approach and mapped it to fashion customers where we’ve seen a multi-step process that includes:

  1. Merchant sets initial regular price
  2. Merchant sets a calendar for promotions
  3. Merchant defines promotions and a pricing administrative team executes them
  4. Merchant sets mark down cadence for the season and pricing administrative team executes
  5. Prices are sent to store
  6. Store associate moves items and tags them

Where can this process go wrong?  It’s best to do a thorough review of the process.  What we’ve done in the past is to look at each step, interview the people doing the task and map out the steps and tools.  For fashion, here are typical areas of opportunity:

Merchant sets initial regular price.  When a product is introduced, the merchant sets the regular price.  They typically define price points to target and then assign specific styles to each price point.  A style is broken down into style-color-size combinations.  This explosion of permutations is where the process gets cumbersome.  For the most part, to make it easier, a style is generally priced the same but there are exceptions for size and color.  Then, if you’re dealing with multiple currencies the process expands for each of the countries you’re dealing with.  Price errors can occur when products aren’t mapped correctly or while converting prices for different countries.

Merchant sets calendar for promotions.  The promotion calendar is built for the season but initially specific promotions are only defined at a high level.  I’m calling out this step because merchants use it for planning but they’re not assigning the specific promotion yet.

Merchant sets promotion.  When the promotional event is closer, the merchant will set the promotions.  This can be specific discounts for a category, price points for a set of items, buy X get Y, or anything else a merchant can dream up.  Usually, a merchant will define these in as much detail they can within a spreadsheet.  Then, they hand it off to a pricing administrative team for execution.  The interpretation between what the merchant wants and what the administrator enters can be a source of errors.  For example, the merchant may inadvertently copy a style from a previous promotion or make an error while assigning a given item to a promotion.  The pricing administrator may be able to catch the errors, but some errors will slip through.

Merchant sets mark down cadence.  Depending on how a product is selling and how much inventory is left, merchants will set mark down cadence.  These are hard marks geared towards optimally selling through the inventory by the end of the season.  The use of separate systems for planning and executing these markdowns can lead to errors. Individual styles are marked down based on manual analysis or an optimization algorithm.  If there is no systematic hand off between setting the prices and executing on them, problems can occur.

Prices are sent to the store.  Once prices are set, they must be transmitted to the stores.  Given that each store has their own point of sale system and might have different prices, promotions, or markdowns, most stores get their own set of prices and rules.  For a large retailer, there can be 400 or more individual systems.  Each system is a potential failure point given that the POS must receive the prices, load them, and pull in the rules.

Store personnel moves items and tags them.  In parallel, promotional sheets are provided to the stores for product placement, promotional signage, and prices.  Any number of issues can occur here. Tight coordination is required at each store to insure the prices are correct on the tags and the products are in the right spot for the given promotion.

Reviewing this process can reveal areas of opportunity to plug the holes.  In this example, an up front system that allows the merchant to directly enter promotions or price changes directly would eliminate the opportunity for confusion with the price administrator.  A system to quickly and reliably transmit the calculated prices to the POS might be needed.  Alternatively, the POS could call out to a central pricing system which would eliminate the need to transmit the price data.  The promotional and placement sheets that store personnel use could be generated out of the price execution system rather than being created manually.  In some cases, electronic tags could be used.  Regardless, once we’ve identified the most egregious spots we tackle them first, then move to the next ones.  Typically, the solution relies on systems that can keep all the relationships in sync.  It usually includes better processes as well.  We look forward to learning about your specific processes and how we can help improve them.

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