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Rethink Private Label Pricing Strategy, Vendor Advises

August 24, 2010
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Retailers routinely under-price their private label offerings in relation to national brands, suggests an executive with a vendor that sells pricing and modeling expertise.
“Retailers need to better understand how private label impacts their store. They need to better understand how to price it,” says Lyle Walker, vice president with KSS Retail, a pricing analysis firm which recently began working with 7-Eleven. “If you have tiered private label,” says Walker, “there is a lot of low hanging fruit when it comes to pricing. In general, we’ve found that retailers are under-pricing their private label.
 
Unlike some industries, retailers frankly admit they look to information systems to squeeze margin out of a squeezed marketplace. One of the first items mentioned on last week’s Walmart earnings call, for example, was its just-completed U.S. implementation of SAP software.
 
Clients often ask Walker what the profit-margin spread should be for private label. Retailers already have transactional systems in place, says Walker. But they aren’t yet making best use of analytics. “They used simple rules-based systems for pricing of even private label,” he adds.
 
7-Eleven will use KSS Retail’s PriceStrat and Heartbeat Systems to conduct extensive market-basket analytics and affinity analysis for promotions. The retailer also will deploy PriceStrat’s cigarette buy-down capabilities for the high-volume category at both the store and headquarters level.
 

KSS analysis starts with a two-year history of data by category, each week, for each store, and looks at how each category reacted to price change, the cross-effects of promotion and other factors. Simulations can be run off the resulting model. The resulting elasticity value is the starting point for profit optimization.   

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