Abstract
Standard approaches to measure price index on a specific retailer against competitors tend to be overly optimistic. The authors propose a methodology that deflects from analyzing solely the price of all products effectively bought by customers by taking into consideration their prior shopping intention. Loyalty schemes are game changers when measuring price index. The study proposes a two-step methodology that comprises on building the customer native baskets and allocating the prices collected to each customer. Under the assumption that a price sensitive customer will not buy a poorly priced product compared to the competitors in that specific period, the authors present an innovative methodology resulting in a more realistic price index metric.
TopBackground
Retail is under very high promotional pressure and personalization is key to survive in such conditions.
Measuring the price index against competitors is a powerful tool on mass marketing to promote products with price continuously below the market or to manage customer perception on a global scale.
The first step into personalizing price on a customer level is to accurately measure it.
Price Index is a weighted average of price in relation to a competitor or a set of competitors for a given product or product group on a given time period (Galkin, 2019).
The process to collect price index involves:
- Step 1:
Matching products that overlap between the focus retailer and the top competitors
- Step 2:
Picking accurate prices on products in competitors of interest (updated over time)
- Step 3:
Compute the index between the retailer price and each of the competitors by product
On a product level, it is quite simple to accurately measure price indexes among retailers. However, combining the price index of a category or overall level is increasingly challenging.
Key Terms in this Chapter
Basket: A set of products bought on a transaction.
Category of Products: A set of products that fulfill the same customer need.
Shopping Mission: The main motivation when shopping. Main shopping missions involve from stock-up missions often known as the monthly shop to convenience purchases related to suppressing a specific need (e.g., diapers, wine).
Substitution Effect: Measures the switching between a set of items. Substitute products are often purchased in different baskets by the same customer and are capable of accomplishing the same need.
Price Index: A weighted average of price in relation to a competitor or a set of competitors for a given product or product group on a given time period. A product or set of products with a price index over 100 is interpreted as having a competitive price on the own retailer, a price index lower than 100 is interpreted as being more competitive in terms of price on the competitors on a given period of time.
Stability Period: Minimum period needed to capture a customer behavior on a business.
Listing Product: A group of stock-keeping units that are on a customer mind when preparing a future purchase of retail goods. It is a level of a product hierarchy grouping a set of products with low substitution effect.
Virtual Product: A group of SKUs with enough similar properties to turn them into the same product on a customer view. The virtual product belongs to a virtual product hierarchy fully independent from the commercial product hierarchy.
Native Basket: List of products to purchase prior to effectively shopping. It is the intended set of items needed prior to factors in-store that influence the actual purchase such as the price index.
Stock-Keeping Unit: A scannable bar code and is interpreted as a single product with individual characteristics such as type of product, packaging, volume, brand and eventual specific components.