To boost its competitiveness in the convenience retail space, The Southern Co-operative wanted to set the best prices to drive customer visits, incentivize sales and protect its margins—but how?
The Southern Co-operative implemented a dynamic, data-driven approach to pricing, enabling it to set the optimal margins throughout its range—especially on products that influence price-perception.
Increasedcustomer visits and incentivizes incremental spend at over 200 stores
Identifiedoptimal prices, helping to lift margins
Predictedto boost units sold year-on-year for like-for-like stores
Business challenge story
Taking control of pricing
For grocery retailers in the UK, the downward pressure on household incomes, the rise of deep discounters and increasing consumer choice are squeezing margins. Smaller convenience retailers like The Southern Co-operative must now work harder than ever to keep their customers satisfied and nurture their loyalty.
“Setting the right price is vital—both to encourage customers to walk into your store and to cover operational and capital costs,” explains Paul Rodford, Group Finance Director at The Southern Co-operative. “If prices are too high, then customers are more likely to make the extra effort to go to a competitor’s store instead. This is particularly true for high-visibility items such as bread, milk and eggs, which heavily influence how expensive customers perceive a store to be.
“As a co-operative, we combine key functions such as buying and distribution with other companies in the group to control our costs and increase our competitiveness with larger supermarket retailers. In the past, we worked on a margin maintenance basis, which didn’t reflect competitor pricing levels. This approach was not optimized for our local market, which created a substantial risk.”
Rodford continues: “We realized that customers perceived our prices as being too high, and that footfall was steadily declining across our franchises. To combat that effect, we started looking at the effect of cutting the price of bread, milk and eggs on footfall and sales. We quickly saw that we gained sales volumes with the lower pricing—but we were also reducing our margin. To both drive sales and protect our margins, we knew that we needed a better method for analyzing pricing, and looked for a way to gain the necessary insight.”
Harnessing the power of predictive analyticsTo solve the challenge, The Southern Co-operative replaced its static approach to pricing with a dynamic, data-driven approach.
“We targeted a solution that would help us to dig down into our sales data to model the wider impact of factors such as elasticity,” recalls Rodford. “For example, if one of our competitors changed the price of milk, we wanted to understand what kind of volume we can expect if we adjusted our prices or left them unchanged. Crucially, we wanted to shape a pricing strategy that would lower the right prices rather than just lowering all our prices across the board—encouraging sales and strengthening our margins.”
Today, The Southern Cooperative is launching a predictive analytics solution to help it identify the optimal prices for different products in different stores at different times.
“In the past, we were essentially only performing pricing administration—making small tweaks to price when we identified a cost price movement,” says Rodford. “Today, that’s all changing. After a 12-month review—in which we assessed the businesses benefits of our proposed approach—we decided to deploy the pricing optimization solution. This will allow our commercial team to analyze the way that our pricing drives price-perception, footfall and, ultimately, sales.
“Any changes to our pricing must be signed off by our own commercial department, which gives us better visibility and accountability around strategic decision-making. Better still, we are now proactively looking at what our competitors are doing in the vicinity of our stores, which means we can set optimal prices at the level of individual stores.”
He continues: “Predictive modeling and ‘what-if’ analyses will become an important part of our new commercial capability. Previously, if our competitors reduced the price of milk across the UK, we were only able to calculate the margin that we would lose if we cut our price to match—we had no insight into the effect on demand or volumes.
“When we have completed our transition to the data-driven pricing strategy, we will be able to uncover affinities between low-margin products like milk and other higher-margin products such as coffee and washing-up liquid. By setting the right price for each type of product, we’re confident that we can drive incremental sales, improve price-perceptions and protect our margins.”
Optimal pricing keeps customers coming backAs the rollout of its pricing optimization solution gathers pace, The Southern Cooperative is already delivering substantial benefits.
“One of our key goals is to gain a better understanding of the products that matter most to our customers,” comments Rodford. “In the past, we had identified around six visit-driving products. Today, we think that more than 40 of our products play an important role in increasing footfall at our stores. What’s more, we will be able to model their elasticity, and determine the likely effect that price changes will have on overall sales.”
He continues: “We are about to trial our first category on the tool, which will enable us to validate the accuracy of our predictive model. By starting out with one of our smaller categories, we aim to confirm that the prices we set deliver the expected improvement in incremental sales and margin. Once we have completed this step, the next will be a gradual rollout of each category across all of our stores.
“Like-for-like improvements in cash margin and sales per store are two of the key metrics that we are looking to measure—and even the relatively small changes that we have made to date are delivering very positive results. Our current investment in price analytics has already improved units sold by 8.5 percent year-on-year in like-for-like stores, but at the cost of margin. We predict that when our new method is in production we will be able to drive our sales further still while protecting our margin rate.”
Looking to the future, The Southern Cooperative plans to use its pricing insights to deliver customized pricing strategies for individual stores.
“We want to be good at the activities we have direct control over: for example, our range and our price,” explains Rodford. “In the past if a competitor opened next to one of our stores, we would typically wait and see what happened to sales before we intervened with discounts, promotions or pricing changes—but that’s all going to change. In the future, we will be able to implement an individual price strategy for stores where competition is most intense—a proactive step to nurture customer loyalty.”
Rodford concludes: “In the convenience space, continually driving up prices is not a sustainable way to drive growth. To keep lifting our revenues year after year, we want to use pricing to create a virtuous cycle that attracts more people to the store and encourages incremental spend—and that’s exactly what our analytics-driven process is helping us to achieve.”
The Southern Co-operative
The Southern Co-operative is an independently owned regional Co-operative Society based in southern England, with over 200 community stores across the South of England in Berkshire, Devon, Dorset, Hampshire, Isle of Wight, Somerset, Surrey, Sussex, Kent, Wiltshire and Bristol. In the financial year 2015-2016, The Southern Co-operative generated sales of over GBP366 million, and shared GBP2.8 million in profits with its members. A champion of locally and ethically sourced food, The Co-operative Group aims to ensure that workers across the supply chain are treated and paid fairly.
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