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Clear and present value: retailers can boost profits by replacing a product-centric view of pricing with a customer-centric approach.

Article Excerpt
Pricing continues to drive consumers' purchasing behavior, which in turn is a major determinate as to how profitable retailers are. But retailers are under fire from a number of directions. Price-cutting by the largest brands; more sophisticated, price sensitive customers; and rising operating expenses all contribute to declining profit margins. Retailers are thus continually searching for sustainable pricing optimization strategies that allow them to grow revenues without losing sales to lower-priced competitors or missing opportunities when customers are willing to pay premium prices.

New research commissioned by Deloitte Consulting LLP documents for the first time the tangible impact of implementing a comprehensive "closed loop" pricing strategy anchored in advanced analytics. A major finding of the research is that by taking a customer--rather than product--centric view of pricing, retailers can boost gross profits, which, in turn, can help drive substantial increases in shareholder value. At the heart of this kind of strategy: technology-based advanced data modeling and analytics that provide insight into consumer behavior at an exceedingly granular level.

To determine the effect that proactive pricing strategies have on the market value of retailers, we asked Cleveland Research Company, an independent investment research firm, to analyze the stock prices of select retailers that had embarked on technology-supported strategic pricing initiatives. The study specifically chose retailers that went beyond simply buying pricing software. Instead, the retailers selected had substantially transformed their pricing organizations, developed new processes and infrastructures to support those organizations, and established direct lines of communication and reporting relationships to the most senior levels of their enterprises. The study then compared the stock prices of retailers that had taken these actions to direct competitors that have not implemented similar pricing initiatives.

The study tracked the stock prices of fourteen retailers that had developed customer driven pricing strategies enabled by advanced econometric modeling and supported by newly organized pricing departments. The retailers involved represent fashion apparel, specialty and grocery verticals. Each of the retailers were tracked for six quarters after they had announced and/or implemented their chosen technology. For comparison, the stock prices of peer retailers were tracked over the same time periods and used as benchmarks.

Among other results, the study found that:

* Retailers that announced and/or implemented pricing strategies boosted their stock prices by an average of 66%, outperforming the Standard & Poor's (S&P) 500 index by an average of 40%. Indeed, one clothing retailer long identified with frequent promotions and prices that undercut competitors saw its stock price appreciate 383% within six quarters of announcing a new pricing initiative. This represented a 352% premium over the S&P 500 performance during the same timeframe.

* Retailers that did not implement price optimization initiatives lagged in share appreciation when compared to those that did. For example, the clothing retailer referenced above enjoyed a...

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