How Can Grocers Make Personalized Pricing Work?

Just one generation ago, almost all groceries were sold in full-service traditional supermarkets; now such stores comprise less than half of the marketplace. Established industry retailers already pressured by long-standing competitors face another challenge as many of the non-traditional retailers now in the space are gaining competitive advantage and taking share by offering low prices.

Success, and in some cases survival, for industry retailers will require they neutralize existing price vulnerabilities. While simply matching prices with competitors is not sustainable, employing a discreet, selective pricing strategy will enable these retailers to win by treating shoppers with a "personal touch."

The Opportunity

For decades, retailers have supported their price-value image by focusing their lowest prices on known-value items (KVIs), i.e., the subset of items believed to disproportionately impact a retailer’s price image. The belief among retailers is that these items (often exceeding 3,000 SKUs at shelf), and the lower prices attached to them, appeal to the majority of their shoppers.

While this approach has merit, it is far from optimal. Thousands of households – each with unique tastes, preferences and shopping behavior – may not consider the designated subset of KVIs to be relevant, or may not notice the retailer’s aggressive prices. If too many shoppers fail to see items that are important to them among the KVIs, this approach fails as a key competitive pillar and further erodes margins by needlessly lowering prices.

Personalized Pricing

Thanks to the data and technology now available, retailers can be much more strategic and efficient in their approach to KVIs by employing personalized pricing. Leveraging detailed basket data, retailers can identify KVIs for thousands of individual households – designate them as personalized known-value items (PKVIs) – and lower prices on these items for an extended period of time.

As PKVIs are considered to be disproportionately important to the household and have a strong impact on members’ price perceptions of the store, lowering prices on these items will help cement a positive price-value image. Storewide KVIs will still be available. However, there will be far fewer of them than before; possibly 70 percent fewer.

The 4 Essentials for Success

Ensuring success with personalized pricing will require that retailers focus on:

1. Price promise – Retailers need to define how competitive their PKVI prices will be, e.g., the lowest in the market, etc.
2. Self-direction – The selection and pricing of PKVIs must be retailer-directed; vendor funding is not required and should not be counted on
3. Customer communication – Retailers must continually alert shoppers to the availability of PKVIs/prices and remind them over time
4. Offer management – Retailers’ systems must be able to accommodate thousands of personalized pricing offers and ensure personalized prices are given to shoppers at checkout

If retailers commit to and execute on these four items, they’ll succeed with PKVIs as a shopper engagement and retention strategy. As grocery retail becomes more competitive, industry retailers wanting to keep shoppers in channel and in store will need to optimize price-value perceptions – and genuinely personalized PKVIs will be essential.