Case study · FMCG and retail · Furniture retail · 7 min read
Source: Pricing Insight diagnostic report and data analysis, April to May 2015, based on the retailer's sales history by SKU. All figures are Pricing Insight estimates. The retailer did not proceed to implementation, so no result is claimed.
A national furniture retailer with more than 40 stores, more than 5,000 products and 239 different price points. Its prices and discounts had grown store by store and range by range, without a common logic, while a falling Australian dollar pushed up the cost of imported furniture. Pricing Insight ran a pricing diagnostic in 2015: a capability survey of staff, an analysis of the retailer's sales history by SKU, and a sized and sequenced plan. The diagnostic identified A$5.6 million of EBIT a year from repricing the long tail of the range, leaving the best-selling 30% of revenue untouched, and estimated that inconsistent discounting was costing 1.5 to 2.0 percentage points of margin, about A$9 million to A$12 million of EBIT a year. The retailer did not proceed to implementation, so the opportunity remains identified, not realised.
| Client | A national furniture and homewares retailer, not named. More than A$500 million in annual revenue, more than 40 stores across Australia, selling on value and range with interest-free finance, protection plans and frequent promotions. |
| Service | Pricing Diagnostic and Quick Wins: capability survey, sales and price analysis, opportunity sizing and an implementation roadmap. |
| Status | Identified. The retailer did not proceed to implementation. |
| Period | March to June 2015. |
| Scope | Full range across all categories: bedroom, mattresses, living, upholstery, dining, outdoor, office and homewares. |
The brief
Make pricing a source of earnings growth, and size how much margin the range, the price points and the discounting were leaving behind.
01A large range priced without a common logic
More than 5,000 products, and most of them small. Over 5,000 SKUs recorded sales in the year analysed, but 1,200 produced 90% of sales and 750 produced 80% of revenue. No single product accounted for more than 1% of revenue. Prices for the long tail had been set one product at a time, largely on cost plus a mark-up, and had rarely been revisited.
Costs were moving. The Australian dollar had fallen from the mid-90 cents in August 2014 to about 75 cents by March 2015, and the retailer's foreign-exchange-driven costs had risen by 26%. Furniture is bought in US dollars and sold in Australian dollars, so every cent of currency movement reached the margin unless prices moved with it.
Management believed the opportunity was there. In the capability survey, staff scored 89% on confidence that new initiatives could improve revenue and margin, the highest score in the survey. The lowest scores were for a published pricing policy (40%), a price-rise process (44%) and a published pricing strategy (45%).
Five problems sat underneath.
Too many price points.
239 different price points across the range, with duplicates a cent apart: $799.95 and $799.00, $599.95 and $599.00. Twenty-five price points carried 50% of revenue and 90 carried 90%.
No price ladder.
Ranges had no consistent entry, mid-tier and premium price, so customers had no clear step up from the price that brought them into the store.
Discounts without a plan.
The 20 best-selling products sold at average discounts of 3% to 53% below their ticket price, with similar spreads across the range. Discounting was not set against a planned net price.
No written pricing strategy or policy.
Staff did not know the retailer's pricing strategy, because none was written down, and price rises were handled case by case.
Limited price analysis.
Good reporting systems, but little analysis of how sales responded to price, manual tracking of competitor prices, and no tools to model a price rise before making it.
How much margin was the range leaving behind, and where could it be recovered with least risk to volume?
02What the diagnostic found
The long tail carried the opportunity. Because no single product was more than 1% of revenue, repricing the smaller-selling products carried little volume risk. Pricing Insight modelled each SKU on the retailer's own sales history and found A$5.6 million of EBIT a year in the products making up the bottom 70% of revenue, with the top 30%, about 115 SKUs, left unchanged as a de-risking step. A further 0.5 percentage points on the top 30%, recommended for a second phase, was estimated at about A$1.0 million of EBIT.
Discounting was the larger leak. Comparing average selling prices with planned unit prices showed discounts that varied widely between similar products and categories. Pricing Insight estimated the cost at 1.5 to 2.0 percentage points of margin a year, or about A$9 million to A$12 million of EBIT. This estimate overlaps the long-tail opportunity and is not added to it.
The diagnostic set six priorities.
Reprice the long tail.
A pilot on the bottom 20% of SKUs, then the middle 50%, with each price checked against the product's features, its brand and competitor prices.
Simplify the price points.
Fewer, deliberate price points, built around the few that carried most of the revenue: $799.95, $1,199.95 and $499.95.
Build a price ladder in every category.
An entry price, a mid-tier value price and a premium price, so that customers step up rather than wait for a discount.
Plan the discount.
Set the target net price first and the ticket price and promotion around it, so that discounts are designed rather than conceded.
Write the pricing strategy and price-rise process.
A published strategy and policy, and a structured method for passing through currency and cost movements.
A dedicated pricing analyst, competitor tracking and training for sales staff in selling at full price.
03What Pricing Insight did
A diagnostic in two months. The work ran from March to June 2015, with the retailer's chief executive, finance director and sales director on the steering committee and a project manager and commercial manager in the working team.
Surveyed pricing capability.
A confidential survey of managers and staff, scored across nine areas of pricing capability in Value, People and Structures. The overall score was 58%, with wide variation between individuals.
Analysed the sales history.
Sales, price and margin by SKU, ranked to show where revenue concentrated, where price points duplicated, and how far actual selling prices fell below planned prices.
Sized the opportunity.
An SKU-level model of the margin available from the long tail, a separate estimate of the cost of inconsistent discounting, and an estimate for a second phase on the top 30% of revenue.
Mapped the issues and the fixes.
For each of the nine areas, the current situation, the changes required and the outputs expected, prepared for a management workshop.
Built the roadmap.
A three-phase plan: bottom 20% of SKUs from July 2015, middle 50% from November 2015 and top 30% from February 2016, with an eight-quarter plan for pricing capability, training and price-rise strategy.
A range priced on a consistent logic, with fewer price points, planned discounts and a written strategy behind them.
04What was identified
A$5.6 million of EBIT a year from the long tail, with the best-selling 30% of revenue held unchanged, and a second-phase estimate of about A$1.0 million from the top 30%. Separately, inconsistent discounting was estimated to cost 1.5 to 2.0 percentage points of margin a year, about A$9 million to A$12 million of EBIT.
The retailer signed an agreement for implementation in August 2015, then did not proceed. No prices were changed under the program, so none of these figures became a result. They remain Pricing Insight's estimates of the opportunity at the time.
Status: identified. The A$5.6 million is a modelled annual EBIT opportunity from Pricing Insight's SKU-level analysis of the retailer's sales history. The A$9 million to A$12 million discounting estimate is a separate estimate that overlaps it; the two are not added together. No pilot was run and no price change was made, so no figure is realised or verified. The retailer is not named. Fees are not disclosed.
05The Pricing Periodic Table elements this work assessed
Three elements delivered as analysis, eight identified and left open. The Pricing Periodic Table maps 61 elements of pricing capability in nine domains across three pillars: Value, People and Structures. The diagnostic delivered the analysis; the structural fixes were identified but not built.
46 Pm, Price modelling: the SKU-level model of the long-tail opportunity. 44 Or, Override and discount analysis: the comparison of selling prices with planned prices that sized the discounting leak. 47 Ps, Price position and key value items: the price points that carried most of the revenue. The outlined elements are what the roadmap set out to build: a clear value proposition (01 Vp), a written pricing strategy and policy (06 Ws, 13 Py), a dedicated pricing analyst (26 Pf), competitor price tracking (41 Ci), a price-rise process (43 Pi), a planned discount structure (51 Dt) and a simplified price ladder (52 Rl).
06Three lessons for a CEO
Look in the long tail first
When no product is more than 1% of revenue, the smaller-selling lines can be repriced with little volume risk. The best sellers, where customers compare prices, can be left until the method is proven.
Count your price points
239 price points, many a cent apart, tell a customer that prices are arbitrary. A short ladder of deliberate price points makes the step up easy and the discount a choice.
An identified opportunity is not a result
The diagnostic sized the prize and set the plan. The margin depended on implementation, which did not go ahead, and the figures here are reported as estimates for that reason.
07Questions this case study answers
How can a furniture retailer improve margin without raising prices on its best sellers?
Reprice the long tail. At this retailer, 750 SKUs made 80% of revenue and no product was more than 1% of revenue. Pricing Insight modelled the products in the bottom 70% of revenue and identified A$5.6 million of EBIT a year, with the top 30% left unchanged.
How much does inconsistent discounting cost a retailer?
At this retailer, the 20 best-selling products sold at average discounts of 3% to 53% below ticket price, with similar spreads across the range. Pricing Insight estimated the cost at 1.5 to 2.0 percentage points of margin a year, about A$9 million to A$12 million of EBIT. The fix starts with a planned net price for each product and promotion.
What does a pricing diagnostic deliver for a retailer?
A scored view of pricing capability, an analysis of sales, prices and discounts by SKU, a sized opportunity and a phased roadmap. Here it took about two months and identified both the opportunity and the order in which to capture it, from the lowest-risk products to the highest.
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Size the margin in your range
The first conversation covers your range, your price points and your discounting, and what a diagnostic would size in eight to twelve weeks. Ron Wood, +61 410 534 099.
Ron Wood is the Founder and Managing Director of Pricing Insight, an Australian pricing strategy consultancy he established in 2007. He has worked in pricing for around 30 years, first as a pricing and commercial manager in consumer goods, building materials and capital equipment, and since then across more than 160 pricing engagements. He also founded Pricing University, which has trained more than 5,000 executives.
To discuss a pricing diagnostic for your business, contact Ron Wood at info@pricinginsight.com.au or on +61 410 534 099, or visit Pricing Insight.
Engagement details and figures are from Pricing Insight's proposal, diagnostic report and data analysis, March to May 2015. All financial figures are Pricing Insight estimates made at the time; none was implemented or independently verified. The retailer is not named. Fees are not disclosed. Photograph: Jean-Philippe Delberghe, Unsplash.
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