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Pricing and margin optimization see the
bigger picture
By Channie Mize, Sector General Manager, Retail, at Periscope, a McKinsey solution, explores the role of each component in delivering the best solution for an organisation.
Te world’s leading retailers now understand the promise of big data and analytics. Tey know competitors are finding insights and making advances, and many have seen their own pilot projects deliver measurable gains in marketing efficiency, sales or margins. Data-driven insights can create value across the business, helping managers tailor assortments at the store level, simultaneously enhancing the customer experience and improving unit economics. A handful of companies have pushed ahead and gained clear
advantages. Using just one or two levers, some are boosting sales by 1 to 3% and margins by 100 to 500 basis points—a significant improvement for many retailers. Using multiple levers across the organisation could improve revenue growth by 2 to 7% and profit by 10 to 20%. Retailers have always struggled with operating at scale, and
many are struggling now to embed insight-driven approaches across their organisations. Inertia is a fact of life in every large organisation, from government agencies to sports leagues, and retailers are no different. As the pace of change increases and the marketplace becomes more complex and competitive, merchandising and marketing teams may not feel they have the time to learn new approaches or master complicated new tools— even if they recognise the value. Without a major change-management effort, most people will
keep thinking, planning and executing in the same ways. Te right people with the right mix of analytical and business experience need to be on board to use much more rigorous decision- making processes, standardise processes across categories and geographies, and synchronise efforts across the organisation. Superior data management is essential to providing refreshed and regular insights, and powerful tools need to be available that don’t require an advanced computer science degree to use. Transformation on this scale is difficult and takes time. Te
“chain to impact” includes both human and organisational factors such as people and process, as well as technical enablers including
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data, solutions and advanced insights. A typical transformation effort has a roughly 30% chance of achieving the targets set by the company. But companies who commit to using an evidence- based approach, building the right analytical team, and leveraging the latest insights and solution breakthroughs succeed with transformation efforts 90% of the time. Here are five top tips to help ensure improved pricing and margin optimization:
1. Remember: It’s a journey not a trip Given the complexity and variety of activities in the retail business, companies can’t move quickly to where they want to be. Tey increase their chances of success by taking small measured steps, each big enough to make a difference in performance but small enough to be embedded and scaled within the organisation. Changes that are too small won’t move the needle on performance, and changes that are too big won’t stick. In addition, companies should commit to a strategic roadmap of how they will embed analytics, insights and actions into their organization and the organization should be educated and committed to this vision. A company that commits to improving pricing each year, for example, can begin by asking what steps it can take this quarter and next. Tat said, senior management should look beyond pricing
or promotions toward broad revenue management, which will mean changing the way they run the business and becoming more insight-driven at scale. Leaders should consider all of the constituents required to
drive their strategy, including organisational elements, such as staff capabilities and best-in-class processes along with technical elements, such as data management, analytics and software systems. Tis holistic approach across people, process, and technology generates significant impact, including better decisions on promotional activities and trade investment, and sustainable change within the organisation.
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