Essential Pricing Rules for Retail Success

A common misconception is that price optimization solutions lack robust rules management. Some believe these solutions focus solely on algorithms and don’t require extensive rule capabilities. This couldn’t be further from the truth.

World-class price optimization requires a sophisticated rules engine. It provides a path for you to enhance your pricing maturity, regardless of your current level. Most grocers can’t jump directly from managing prices in spreadsheets to implementing detailed category reviews and enterprise-wide price elasticity analysis. Imagine trying to put someone with no racing experience straight into a Formula One car—it’s a recipe for disaster. Professional drivers train for years; you can’t skip the fundamentals.

A typical pricing journey for grocers often begins with national pricing managed through ad-hoc spreadsheets. It then progresses to more structured pricing with approval processes and the use of standardized enterprise tools, incorporating basic price rules and recommendations. A significant leap occurs when you adopt AI and machine learning to determine price elasticity. But true innovation emerges when you connect lifecycle pricing and demand forecasting with each other and the rest of your retail operations—integrating with inventory, promotions, and other key systems. A more detailed explanation of this pricing maturity curve can be found here.

Rules can be complex, and poorly executed pricing rules can lead to unintended—and often strange—pricing outcomes.

Here’s a real-world example involving toothpaste in a grocery setting:

We’re looking at a 2-pack and a value 3-pack of Crest toothpaste.

The 3-pack is priced at $8.79.

The 2-pack is priced at $4.99.

The mistake isn’t evident for most people, but if you determine price per ounce, the 3-pack is $0.54 per ounce, and the 2-pack is $0.46 per ounce. 

It is a simple mistake, but from a customer perspective, this can seem deceptive because most will see $8.79 compared to $4.99. The price per ounce is always in small print on the label, so customers might feel taken advantage of.

Sadly, these mistakes are common.

A study by Coresight Research found that 96% of retailers experience issues in pricing and promotion execution. Product pricing errors were listed as a retailer’s top challenge, with three-quarters of retailers reporting a mispricing rate of at least 5%. One in five retailers reported a rate above 15%.

That’s an incredible loss! 76% of retailers have 5% of their assortment priced incorrectly, and t20% of retailers have 15% of their assortment priced incorrectly.

Why does this happen? Pricing isn’t simple. It’s a large web.

1. There are many different rules
2. Those rules layer on top of each other
3. Not every item is the same size (ex: 75, 100, and 150oz Tide)
4. Assortment varies across you and your competition (ex: Not everyone carries the same Tide)
5. A single change, a competitive change or cost change, can ripple throughout your assortment and result in multiple price changes to keep things aligned

Without good pricing rules management, items get lost or forgotten about when a single change occurs. Most often, a person must remember the relationship and make the change to adjust it. And if you forgot that day, because we’re human, that mistake can persist for days or weeks. 

A good pricing solution needs a solid foundation of price rules management.

Here are some of the capabilities a retail pricing solution should have:

A Comprehensive Rule Set

Pricing is a dynamic challenge, with the market constantly shifting and new complexities emerging. Additionally, any given product category has different rules that need to be applied, and those rules must follow regulatory compliance while meeting your price strategy. 

Here are some of the rules in ClearDemand’s pricing system:

• Flexible ending numbers with multiples pricing
• Price families (including style and size)
• Brand and size parity
• Competitive index (CPI)
• Margin
• Product line (Good, Better, Best)
• Attribute premiums (Organic, Energy Star)
• Pricing limit rules
• Price change amount (max/min % or absolute)
• Number of price changes (% or absolute)
• One price zone to another
• Price locks
• Rule indirection
• Master-Subordinate relationships

Prioritization

Rules can easily conflict, so when that happens, there needs to be some set of prioritizations to keep them aligned.

Let’s take a simple example.

Suppose you have a cold brew coffee that costs $2.50, and you have two rules: (1) a 50% margin rule and (2) a competitive rule that you are to be 10% below the competition. If your competitor prices the item at $4.75, both rules can’t be satisfied. Prioritizing the competitive rule would set the price at $4.28. Prioritizing the margin rule would price it at $5.00.

Cross-Item Alignment

Product assortments vary across competitors and your stores.

However, you must create a consistent price and competitive image against these varying assortments.

Assume that you are carrying two sizes of Tide Pods: (1) 32 pods and (2) 85 pods. You want to give the customer a discount or a lower price per ounce if they buy the bigger item, but you also want to make sure you’re matching competitive prices.

Let’s say your competitor only carries Tide Pods with 43 pods. If they set their price to the equivalent of $0.42 price per ounce, how do you match that item? Well, you will want it to look something like this graph below, where your smaller item costs a little bit more price per ounce and your larger one, a little bit less than the competition, but to where it makes sense.

These rule applications become more complicated when you throw in the add-on attributes, such as the Tide Plus Downy liquid detergent.

Brands and Private Label

Private label products are critical components of retailers’ strategies. As a result, their pricing has become more complicated. Retailers can have several different private labels with different associated levels of brand quality and value. They need to keep these prices aligned within their brand value, across national brands, and across other competitors’ private labels.

Transparency

As more rules are applied and prioritized, it becomes difficult to understand what is going on. Hence, a good rules management system will allow users to investigate why a price was set the way that it was.

Intuitive Management

Because of the complexities and number of rules, retailers need a way to set up and manage all of them. It’s easy for their management to spiral out of control, becoming unruly and no longer understandable.

Ability to Relax or Soften Rules

Rules are often considered “hard” rules that shouldn’t be violated. But what is the cost of that non-violation? 

Let’s look at a prior example from above where we listed a competitive rule (10% below the competition) and the margin rule (50% margin). Should the competitive rule always have been 10% below the competition? Would 5% or matching have still achieved the necessary price image but at a greater overall profitability and revenue? 

This is where rule softening comes into play. You can align with your goals, see the cost of a rule, and test whether it is worth relaxing in situations. I wrote about it more here.

Price optimization and management should not be considered two different solutions. Rather, improving price management is a step toward enhancing your price maturity toward more predictable and innovative pricing. While not always discussed, a solid rules management system is essential for accelerating price maturity, especially in the beginning. 

As your retail organization matures, you may find yourself softening and opening many of your rules to allow science to see how your customers react to your pricing. But that is for a future discussion on achieving an innovative, visionary pricing team and capabilities.