KVIs: The Key To Dynamic Pricing
Dynamic pricing has all kinds of benefits. Retailers can use it to drop prices on food that is about to expire, reducing food waste and the carbon emissions it produces. It can be used to trigger customers’ reward centers in the brain, turning getting a deal on groceries (like buying airline tickets and hotel reservations) into a kind of game. And it’s a powerful tool for competing with other retailers and winning customer loyalty. But much of how consumers respond to dynamic pricing depends on how retailers handle Key Value Items (KVI).
Historically, retailers did not revisit their KVI pricing more than once or twice a year. But KVIs are the anchor products for most consumers. And with dynamic pricing becoming more common thanks to the Amazon model, retailers can’t afford not to include KVIs in their dynamic pricing strategy.
KVIs Drive Customer Perception
What we’re seeing across the country is that, in areas where deeply discounted grocery retailers like Aldi or Lidl are being built, stores around them are dropping prices. In fact, after Amazon announced plans to drop prices at Whole Foods, retailers near those stores (once nicknamed Whole Paycheck for their high prices) also dropped. As it turned out the big price reductions at Whole Foods were far less significant than touted. But the perception lingered in the minds of customers that Whole Foods was now a high quality, sustainable retailer with lower prices. So surrounding retailers had to keep prices lower in order to compete.
The items that have the biggest impact on consumers’ choice of retailers are, obviously, KVIs. Because consumers buy them more often, they’re far more likely to be aware of their prices at various stores. So KVIs have a disproportionate impact on consumer perception. And as the Whole Foods experience made clear, perception drives action.
Pricing has to be set not only on historical
With so much change happening ongoing, you may have competitors you thought you had a bead on who are now pricing differently, creating unique pricing situations based on new competitors (Aldi, Lidl, Whole Foods, Amazon).
KVIs Are The Cornerstone
As research by McKinsey has pointed out, KVIs are a cornerstone to a dynamic pricing strategy. In creating a dynamic pricing strategy, a recent report said:
“Retailers can often begin with only the KVI and competitive-response modules. These help retailers nimbly respond to competitive moves on key items. Retailers can then add the rest of the modules (long tail, elasticity, and omnichannel) over time.”
As many as 65% of consumers are open to price changes throughout the day, especially if a product is reaching a sell-by date, according to a report by Displaydata and Planet Retail RNG. And more than half accept dynamic pricing if it is to price match, even though, the report shows, 25 percent of retailers aren’t convinced that customers will accept these price changes. The report said nearly 85 percent of retailers do agree that price agility can improve store efficiencies and margins and increase consumer loyalty.
But the key to dynamic pricing is to look at it on a store-by-store basis. Some KVIs are consistent across stores and regions, but others are more specific to the area. And who the nearby competition is—such as an Aldi—makes an enormous difference in how retailers should tackle pricing.
In the fierce competition for margins, responding to customers and competitors in real time is no longer optional.
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