Background and Challenge
A national U.S. discount retailer was facing new competition from companies that were refocusing on budget-conscious consumers during the recession. L.E.K. Consulting was engaged to assist in developing a pricing strategy to maximize sales and margins.
Approach and Recommendations
Based on the retailer’s requirements, L.E.K. provided research and analysis to establish a structured pricing strategy, conduct competitive benchmarking, and incorporate customer feedback. The project was designed to maximize sales and margins, while also preserving and enhancing the retailer’s reputation for consumer value.
The L.E.K. team conducted interviews with management and vendors to understand current pricing methodologies and processes. Critically, L.E.K. also initiated an extensive price elasticity analysis across the market, and clustered categories across the store in terms of apparent price sensitivity. L.E.K. also leveraged its competitive benchmarking results and customer feedback insight to establish a comprehensive pricing framework.
By applying this pricing strategy, L.E.K. identified potential pricing opportunities from a representative set of categories and tested the proposed pricing changes to further validate and refine the framework.
During the test phase, L.E.K. determined that several hundred items were considered underpriced relative to the defined pricing guidelines. The margin impact of adjusting these prices to meet the guidelines had the potential to yield tens of millions in incremental gross margin.
Results
Following the successful test phase, an implementation plan was put in place to roll out the new pricing strategy during the course of a year. The initial tests SKUs yielded enough incremental margin to pay for the cost of the project 10 times over.
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