Measuring the Impact of Price Changes:
In previous posts, I touch on ways to leverage price intelligence data and how it is important to gain a more granular view of the competitive landscape. It all comes down to being smarter — converting price intelligence data into value-added and profitable merchandising and pricing decisions. So this is great, but does your firm have an action plan to measure the impact of price changes? Is there a consistent practice of following up on the incremental or loss of sales and margin dollars derived from price changes implemented?
Here are some of my insights from my experiences as a buyer – what you can do and what aspects of the business you can improve by measuring the impact of your price changes.
Plan Strategic Sessions
It is important that the key decision-makers gather regularly to review the sales and margin impact of a key pricing changes.
On high volume/key items, it is important to evaluate the effects of pricing changes in order to make sure your merchandising and planning is forward thinking and effective. Ensure that your merchandisers and managers are meeting regularly to review the ROI and impact of pricing decisions. Often merchandisers need to make pricing decisions due to a sudden competitive issue and are actually empowered to do so by their senior managers, as long as the changes meet certain margin criteria. This is fine, however, it can cause a sudden spike in sales (good for the top line numbers) but have a negative impact on overall gross margin and inventory levels. It is important to meet regularly to keep track of metrics and adjust strategies if needed.
Yes, it is important to measure the impact of price changes, but it is equally as important to set targets to gauge the success (or lack thereof) of the changes implemented. The targets should involve forecasted unit and dollar sales predictions, margin gain or loss, resource spend to make this change happen (i.e. signage, extra personnel), etc. It is important to be specific in setting these targets – the more specific, the better.
Spillover to Other Areas: Merchandise Planning
Key insights can be gained from the measurement of a price change decision, which can spill over into many areas of the business. The most important one in my view is the effect that a price change has on inventory and merchandise planning. This is especially important when measuring the effectiveness of price changes after a promotion (see my last post Price Intelligence for More Effective Promotions for more content).
In my experience as a buyer, inventory control was by far the most important metric evaluated after sales and margin. Inventory is a double-edged sword. Having too much or too little can really influence sales and margin. Too much inventory can cause margin erosion, as a merchant may need to take markdowns to blow through stock. Having too little inventory is a missed sales opportunity and can seriously affect top line sales and the eventual impact on the bottom line can be devastating. Changing your price can have a positive or negative impact on your inventory position. It is essential to actively review this metric. It is about constantly improving and enhancing the predictability of how a price change can affect inventory levels for an item or category. You may have brought in too much inventory for a promotion and end up left with too much supply on hand at the end of it. Yes, it is almost inevitable that you will need to do something to ultimately help move through this inventory, but it is important to keep measuring the impact promotions and price changes have on your stock levels to continue to improve. Over time, small improvements add up and can save an organization millions. Hey, why not measure this as well?
Also, measuring this type of performance can allow merchandisers to optimize space (floor space in a brick and mortar establishment or virtual space on the web). This could mean dedicating an end cap (end of aisle display) to a particular item that usually nets high returns from a drop in price or shrinking space for an item that you see nets the same returns regardless of how and where the item is merchandised (could be true for commodity-like items). Space optimization and price intelligence do work together.
The bottom line at the end of the day is the bottom line. It is important to implement a price intelligence solution that is accurate, that can process millions of data points and that is robust enough to allow you to make informed and profitable pricing decisions. This being said, how you adapt to and measure the decisions you make will enhance the value of the price intelligence solution and in the end, the long-term profitability of the company.