Retail Pricing Based on Product Hierarchy Groupings

As customers focus more on retail price, it has become very difficult for retailers to plan and administer price at an individual item level. Hence a new methodology “product hierarchy group pricing” is introduced, wherein pricing is based on collective conceptualization of items. This has proven to be a great boon for retailers by reducing their workload and also maintaining good customer satisfaction. This white paper aims to discuss this new pricing methodology “product hierarchy group pricing” in detail.

Retail Pricing Based on Product Hierarchy Groupings

About the Author Hari Raguraman Hari Raguraman has been associated with Tata Consultancy Services (TCS) for the last 4.5 years and has an overall experience of 8 years. He has extensive experience in providing solutions for the retail pricing system architecture and analytics domain. He is currently working for a leading US based pharmacy retailer in pricing analytics spectrum.

Retail Pricing Based on Product Hierarchy Groupings

Table of Contents 1. Introduction

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2. Product Hierarchy Group Pricing – Process Overview

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3. Product Hierarchy Group Pricing – Advantages / Limitations

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4. Product Hierarchy Group Pricing – Types

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5. Static Product Hierarchy Group

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6. Dynamic Product Hierarchy Group

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7. Flavor Grouping

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8. Size Parity Grouping

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9. Brand Parity Grouping

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10. Family Code Grouping

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11. Case Study

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12. Conclusion

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Retail Pricing Based on Product Hierarchy Groupings

Introduction An item or Store Keeping Unit / Stock Keeping unit (SKU) represents the basic unit of commerce in the retail industry. The retailer sets the price based on the item past sales performance, current market observation, quantum of customer base, and the store spread. Earlier, a majority of retailers followed the process of ‘single product hierarchy pricing’, where items were evaluated and the market pattern was forecasted on an individual basis without any further groupings or association. Though this was easier to perform, it was inaccurate and did not represent the true essence of pricing since it did not take a holistic view. With this in mind, a path breaking concept, ‘product hierarchy group pricing’ was introduced in the retail world, where items with similar characteristics and attributes are collectively conceptualized, referred, and mass managed by the Retailer Business team / their pricing systems. In general, more mature businesses bunch up products for easy reference and holistic analysis, as illustrated below. This is a similar practice cultivated in retail pricing using ‘product hierarchy group pricing’.

Product Groupings Fleet Vehicle

System

Sub-System

Increasing Aggregation for better synthesis & analysis Component Level Product Groupings

Figure 1: General Product Groupings Usage for Analysis

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Retail Pricing Based on Product Hierarchy Groupings

Product Hierarchy Group Pricing – Process Overview Here, Items with similar attributes like flavor, brand, size and so on, are grouped together for pricing consideration, to which, unified pricing rules are applied. Product hierarchy groupings as such are not physical items, but are more like the abstract prototypes of SKUs. The SKUs within a hierarchy group inherits the attributes of the parent product hierarchy grouping and adds further attributes to it. These additional attributes not specified in the parent product grouping, set the SKUs apart. For example, let’s say our TCS Smart Store sells four types of denim jeans, namely: dark stone wash, light indigo, light stone wash, white finishes of the same size, brand, model, fabric and each represented by an individual SKU number. All these 4 SKUs are bunched together to form the jeans product hierarchy group. It also sells a red color denim shirt, L size, and are of the same brand identified by a separate SKU number. Each SKU represents the actual sellable units and by observing the past one year sales pattern of these SKUs in the total set (4 in jeans & 1 in shirt), it was identified that each individual SKU in the jeans group contribute to 15% sales of the total set, while the denim shirt contributes to 40% sales of the total set. In the above example, an individual item level denim shirt outsells every variant of jean SKU by nearly 150%, but at product hierarchy group level, jean product group contributes toward 60% of sales while the shirt account for only 40% of sales.This information would have been more difficult to capture if the SKUs performance was compared to other SKUs instead of product groupings compared to other product groupings.

Dark Stone Wash

15% Sales

Light Indigo

15% Sales

Light Stone Wash

15% Sales

White

Denim Shirt

15% Sales 40% Sales

60% Sales

Figure2: Product Hierarchy Grouping - illustration

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Retail Pricing Based on Product Hierarchy Groupings

Product Hierarchy Group Pricing – Advantages / Limitations Advantages 1. Easy application of unified pricing rules across all the items with similar attributes 2. Easy control of size parity and brand parity pricing structures 3. Effective management of price changes, as any change to the control item of the set will cascade automatically to all linked items. 4. Helps take a holistic view during the sales pattern analysis 5. Helps perform Content Enhancement during price optimization / modeling, since not all products have a rich price change history, making it a challenge to understand customer’s reaction to price changes. The product groupings along with the statistical analysis technique Bayesian shrinkage, helps build demand profiles or sales forecast for other, lower confidence items by borrowing information within a product group from high confidence items. Limitations 1. Additional work involved due to grouping definition in the Item Price Management process. 2. Once the group structure is defined, it limits the price changes applied to individual items within it and if required, all the link parameters within a group need to be modified.

Product Hierarchy Group Pricing – Types There are two major types based on hierarchy group definition, namely: a. Static Type b. Dynamic Type The different types based on various linking parameters include: a. Flavor Grouping b. Size Parity Grouping c. Brand Parity Grouping d. Family Code Grouping

Static Product Hierarchy Group This is a type of product grouping, which once created in the system does not change unless prompted by the user. Here the SKUs linked are specified explicitly during the group definition by the user. For example, in the jean’ product grouping, illustrated in Figure 2, if it is explicity defined by the user that only SKUs of dark stone wash, light indigo, light stone wash, white finishes of same size, brand, model & fabric should be represented, then it is classified as a Static type.

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Retail Pricing Based on Product Hierarchy Groupings

Dynamic Product Hierarchy Group This is a type of product grouping which changes automatically whenever an item with a similar attribute defined in the product grouping is added to the item system or removed from the item system and does not require any user intervention to change the item composition within the group. Here, the linked SKUs are selected dynamically via. queries and not explicitly defined by the user. For example, in the ‘jean’ product grouping, illustrated in Figure 2, if a query is used to select various jean SKUs of same size, brand, model and fabric, but with different finishes, then it is identified as Dynamic Type. Control Item: In every Product Hierarchy group, an item is set as a Control Item, which is used to administer the price change for the entire set. For example, in the ‘jean’ product grouping (fig.2) Dark Stone Wash item can be set as the control item which acts as a pivot for price change to the entire set. Any change to this item will be automatically cascaded to the entire link items based on the pricing relationship set. For example, white – jean may be set as 90% retail of control item, then it will be set to 90% automatically whenever the price change is applied to control item.

Flavor Grouping This is a product group formed by linking items with similar size, brand & retail, but with different flavors. lAn item within the flavor group will be identified as the control item which helps to manage the retail price of the entire set. lAll the items in this group are supplied by the same vendor and constituted within the same merchandise category. lIf a retailer follows zone based pricing, then all items in the group will have the same base price across all the price zones In the above example, there are 5 different SKUs with similar attributes, but different flavors. l

Classic Bubble -$1.29

Sweet Watermelon -$1.29

Berry Paradise-$1.29

Polar Ice-$1.29

Figure 3: Flavor Grouping - illustration

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Spearmint-$1.29

Retail Pricing Based on Product Hierarchy Groupings

Attributes (Common)

Flavors

Brand : Wrigley’s

Classic Bubble

Retail Price: $1.29

Watermelon

Unit Size: 15 Sticks

Berry Paradise

Same Price in all Price Zones

Polar Ice Spearmint

Of the five flavors, Classic Bubble chewing gum is set as the control item and all other flavors become its associated link items, thus forming a Flavor Group product hierarchy. When a price change is required for the entire set, it is enough to trigger a price change for the control item alone, which automatically cascades the price changes to other flavor link SKUs. Further, while performing the sales forecast or measurement, the SKUs are considered as single by the control item alone, thus allowing an entire forecast by the total set rather than individual SKUs.

Size Parity Grouping This is used to maintain a retail relationship between multiple sizes of the same item, so that the smaller size ones have a higher unit price per unit of measure than a larger size one. lAll the items within this group will have same brand, same flavors but with different size and retail based on size. l

3 Litres - $10

1 Litre-$4

Figure 4: Size Parity Grouping - illustration

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Retail Pricing Based on Product Hierarchy Groupings

In the above example, there are 2 different SKUs with similar attributes, but different sizes. Attributes (Common)

Size

RetailPrice

RPU (Retail Per Unit)

Brand: Sprite

3L

$10

$3.33

Flavor: Lemon Soda

1L

$4

$4

Same Supplier Same Merchandise Hierarchy

Here, the retail price of 3l Sprite is 250% of 1l Sprite, thus providing better Retail Per Unit of measurement for a larger quantity than a smaller one. Similar to flavor grouping, whenever the control item of this group undergoes a price change, it will automatically cascade the price change to size parity link items and maintain the RPU difference as defined.

Brand Parity Grouping This refers to the brand type parity grouping i.e. own brand (store brand) type Vs general brand (national brand) type and not between different brands within a brand type. For example, Johnson & Johnson Gauze pads of General Brand Type Vs. TCS Gauze Pads of Own Brand type and not Johnson & Johnson Gauze Pads of General Brand Type Vs. Nexcare Gauze pads of General Brand type. lThis is performed to ensure that the retailer’s own brand items are less priced when compared to the general brand items. lThis provides a compare and save provision to consumers as the retailer’s own brand items are produced and marketed by the retailer whereas the general brand items are produced and supplied by the outside vendor to the retailer. Thus, normally the retailer’s own brand items will be 10% ~ 15% cheaper than the general brand items. lIf flavor grouping is performed for the set of own brand and general brand items, then only the flavor group control item is used for setting up brand parity relationship. l

General Brand-$2.99

Retailers Own Brand-$2.49

Figure 5: Brand Parity Grouping - illustration

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Retail Pricing Based on Product Hierarchy Groupings

In the above example, there are 2 different SKUs that share similar attributes, but different brand types. Attributes (Common)

Brand

Retail Price

Size: 10 Strips

J&J (General Brand Type)

$2.99

TCS (Own Brand Type)

$2.49

Just like any other product groupings, whenever any of the items in the size parity groupings undergo a price change, then automatically all the linked items are adjusted to maintain the brand savings as set.

Family Code Grouping This is used to maintain a retail relationship between multiple brand items of the same size, brand type, flavor, retail and merchandise hierarchy. lItems linked need not have the same retail. This is performed after a close case-by-case review and analysis. l

Colgate - $4.89

AquaFresh- $4.89

Figure 6: Family Code Grouping - illustration

In the above example, there are 2 different SKUs that share similar attributes, but belong to different brands within a brand type. Attributes (Common)

Brand

Retail Price

Size: 10 Oz.

Colgate (General Brand Type)

$4.89

AquaFresh (General Brand Type)

$4.89

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Retail Pricing Based on Product Hierarchy Groupings

Case Study

Crest Sensitivity-6Oz.-$5.89

Colgate-12Oz.-$8.99

Flavor Grouping

Size Parity Grouping

Colgate-6Oz.-$4.89

Brand Parity Grouping

Family Code Grouping

Family Code Grouping

AquaFresh-6Oz.-$4.89

Crest Pro Health-6Oz.-$5.89

Size Parity Grouping

TCS-6Oz.-$2.89

Flavor Grouping

Crest Extra Whitening-6Oz.-$5.89

Colgate-3.2Oz.-$2.99

Product Hierarchy Grouping Product Hierarchy GroupLines

Figure7: Case Study - illustration

The above figure (Figure 7) illustrates a case followed by the major US based pharmacy retailer. Apart from various product hierarchy groupings, it also illustrates the product hierarchy group linkings followed in practice.

Product Hierarchy Group Links It is the mechanism by which multiple product hierarchy groups are linked together. For example, flavor group with brand parity group. For this type of mechanism to be set up, a control item from the linked groups will be designated as ‘super control item’ which will administer all the individual control items with in a group link and indirectly all the items within in the product group link.

Figure 7: Case Study illustrates the following: Colgate – 6 Oz. - $4.89 & AquaFresh – 6 Oz. - $4.89 represent the Family Code Grouping - 1 with same retail. Aquafresh – 6 Oz. is the control item for this set.

l

Crest Pro Health – 6 Oz. - $5.89 & Aquafresh – 6 Oz. - $4.89 represent the Family Code Grouping - 2 with different retails. Aquafresh – 6 Oz. is the control item for this set.

l

Colgate – 12 Oz. - $8.99 & Colgate – 6 Oz. - $4.89 represent the Size Parity Grouping – 1. Colgate – 6 Oz. is the control item for this set. lColgate – 3.2 Oz. - $2.99 & Colgate – 6 Oz. - $4.89 represent the Size Parity Grouping – 2. Colgate – 6 Oz. is the control item for this set. l

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Retail Pricing Based on Product Hierarchy Groupings

TCS – 6 Oz. - $2.89 & Crest Pro Health – 6 Oz. - $5.89 represent the Brand Parity Grouping – 1.

l

Crest Pro Health – 6 Oz. is the control item for this set.

l

Crest Sensitivity – 6 Oz. - $5.89 & Crest Pro Health – 6 Oz. - $5.89 represent the Flavor Code Grouping – 1. Crest Pro Health – 6 Oz. is the control item for this set.

l

Crest Extra Whitening – 6 Oz. - $5.89 & Crest Pro Health – 6 Oz. - $5.89 represent the Flavor Code Grouping – 2. Crest Pro Health – 6 Oz. is the control item for this set.

l

AquaFresh – 6 Oz. - $4.89 is the ‘super control item’ for the product hierarchy group links. Groupings – Framework The following figure represents the typical framework followed for establishing the various product hierarchy groupings and associated group links.

1

Perform Detailed analysis of the item inventory & select the set of items that needs to be priced relative to one another

2

Define the ‘Control Item’ which drives the overall price position of the entire product grouping & product group Links

3

Select the attributes that defines the product group & product group links (for example brand, size, brand type, flavor)

4

Set Price relationships within the product groupings & product group links based on customer expectations, competitive prices & past sales history analysis

5

Price of each linked SKUs in a product groupings & product group links are calculated

Figure 8 : Case Study - Frame Work

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Retail Pricing Based on Product Hierarchy Groupings

Price Change Flow When a price change is executed for the AquaFresh – 6 Oz. item, further flow path sequence to other linked items or linked group items are executed as illustrated below:

Price Change

AquaFresh-6Oz.-$4.89

Pricing Analyst

Super Control Item

Colgate-6Oz.-$4.89

Crest Pro Health-6Oz.-$5.89

Family Code Link Item-1

Family Code Link Item-2

Colgate-12Oz.-$8.99

Colgate-3.2Oz.-$2.99

Crest Sensitivity-6Oz.-$5.89

Size Parity Link Item-1

Size Parity Link Item-2

Flavor Code Link Item-1

Crest Extra Whitening -6Oz.-$5.89 Flavor Code Link Item-2

TCS-6Oz.-$2.89 Brand Parity Link Item-1

Figure 9: Price Change Workflow

Conclusion Pricing based on Product Hierarchy Grouping has transformed retail business users swiftly from item level pricing methodology and increased their purview to broader product groups. The simplicity of product administration in retail pricing and grouping products for a holistic level of sales analysis have resulted in high level of acceptance from retailers.

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