Price, price elasticity, SKU share of a category, and how SKUs cannibalize each other are all part of an elaborate ecosystem. We advise retailers to model price elasticity and substitutability of a SKU within its category - and so be able to build an optimized range, typically comprising fewer SKUs and a stretched price ladder. Retailers need to know how to optimize to overcome high margin SKUs being cannibalized by low margin SKUs. But in the absence of detailed modeling, what do you do? Well, OC&C and Ugam have teamed together to create a simple set of rules to help grocery retailers. We’ve synthesized decades of our experience into 10 Golden Rules.
Category managers want an effective range and pricing strategy to maximize their sales and profitability. To achieve this, understanding our 10 universal rules that govern how grocery SKUs interact will help you:
- Higher share SKUs have lower price elasticity
- Higher share SKUs have higher substitution
- Higher price elasticity is correlated with lower substitution
- The exception to this rule being, high price SKUs display high price elasticity, which is correlated with high substitution. (Because more volume sits at the lower price point, the former rule is more common).
- Lower price SKUs tend to have higher shares
- Lower price SKUs have lower price elasticity and higher substitution
- Categories with stretched price ladders have low category price elasticity, and low average SKU price elasticity (conversely, a compressed price ladder leads to high average SKU price elasticity)
- Categories with lots of SKUs (and so lots of low share SKUs) tend to have high price elasticity and low substitution
- There is generally an opportunity to create a cash margin positive impact by de-ranging the worst 10% of SKUs in the category (worst meaning low margin and high cannibalization)
- Categories with a wide spread of margin have more SKU rationalization opportunities, as there tends to be more opportunity to replace demand for low margin SKUs with high margin SKUs
Pricing strategy and SKU selection are the most important growth levers for a category manager and apart from catering to it, these 10 rules are helpful while making decisions around SKU rationalization, promotional strategy etc. If used effectively, these rules can help category managers improve their sales and profits in a sustainable way.