Harnessing the power of predictive analytics
To 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 customer coming back
As 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.”