KVI In Retail — 4 Common Errors In 2022-2023

KVI is a product, a consumer knows exactly the price of in different stores or makes an effort to find it out. To purchase such a product, a consumer will certainly try to go to the store with the best price, unless this store creates too serious inconvenience for him.

That's how it works: the store reduces its margin by 70 cents on KVI yogurt, and gains more customer visits and, in addition, €10-€12 of margin on a clothes trimmer (on sweets and cookies, on batteries, and so on).

The difficulty is that consumers are different, and they focus on not only a KVI yogurt, but on a set of KVIs: meat, vegetables, coffee, beer, pasta — the list can differ in each case. Often, there is no store that provides the best deal for the entire KVIs list. Therefore, customers either go where most of the list is cheapest, or split their purchases into parts: "for these products I go to this store, and for those — to that one". Which store the consumer visits more often, that store more often gets €10-€12 profit "for fabric shaver".

Of course, KVI is not only about grocery retail. We use grocery examples because they help to give a clear explanation.

In the summer of 2022, a grocery store chain was scaling and adopting dynamic pricing across all its stores.
The chain launched dynamic pricing in a pilot store. Its results were compared to the control store, with the "old" pricing.
The retailer's KVIs list included paper napkins with high sales.

Imprice AI-driven algorithms determined that these napkins was not a KVI, but a fairly popular Foreground product, whose demand hardly changed within a certain price interval. Pricing experts increased the price of the napkins to the optimal level; the result was a significant increase in margin, gross profit and revenue, compared to the control store:

And here is the dynamics of the entire category "Paper napkins" in the control and pilot stores:

In the summer of 2022, an online skin care cosmetics store was in the middle of a rollout process, launching dynamic pricing step by step to its entire assortment range, category by category.

Imprice AI-driven algorithms detected that one expensive shampoo was a hard KVI; that is, the demand for that shampoo was very price sensitive. The online store did not manage this shampoo as a KVI before, and did not monitor its prices on the market.

In mid-July 2022, the store launched Imprice-based monitoring of competitors' prices for the Hair Cosmetics category, including on marketplaces. At the end of July, pricing experts implemented KVI pricing strategy for the category, considering competitors' prices. Dynamic competitive KVI pricing is a strategy that ensures growth in sales almost immediately; in online stores, sales growth is particularly rapid. Here are the first results of KVI pricing in the category "Cosmetics for hair":

An increase in sales of a KVI leads to an increase in sales of other goods which are bought together with the KVI; such goods can be KVIs also.
For example, with the KVI shampoo, consumers often bought a KVI conditioner of the same product line.
More important fact is that with KVI consumers buy high-margin Foreground items, on which a retailer can recover a slight decrease in marginality by KVI.

Let's review the financial results — how much the store gained with the identified "hidden KVI" and on the goods that consumers bought together with this shampoo.

Sales of the KVI shampoo:

A grocery chain launched dynamic pricing in a pilot store, comparing the store's results to a control store, with the "old" pricing.

The retailer's KVIs list included a tomato sauce of a popular brand in a 500 ml package. For this item, the store always kept the first or second minimum market price.
Imprice algorithms detected that this sauce was a soft KVI, that is, up to a certain price limit, demand was barely dependent on price.
Pricing experts raised the price of this soft KVI to the optimal level, and the store got an increase in margin, gross profit and revenue compared to the control store:

In the summer of 2022, a grocery store chain was scaling and adopting dynamic pricing across all its stores.
The chain launched dynamic pricing in a pilot cluster of stores. Its results were compared to the control cluster, with the "old" pricing.
All stores had the same promotions, managed by the chain's specialists. To calculate the dynamic pricing results correctly, pricing experts removed sales of promo items from reports.

The Imprice algorithms determined that one milk was a hard KVI, that is, a product with the price ultrasensitive demand.
Though the chain experts considered this milk as a KVI, they utilized the "second minimum price on the market" strategy for the item. The algorithms recommended changing the pricing strategy to the "lowest price on the market".
From July, the store implemented the new "lowest price" pricing strategy for the KVI milk.
In summer, people spend more time outside the city or go on vacation. Thus, the third quarter is the low season in grocery, and July and August are the lowest months in terms of sales — the performance of the control store showed it clearly. But in the pilot store sales of the KVI milk grew with the new pricing strategy:

Due to the increase in the number of cash receipts that contained the KVI, one can ask: could it be the effect of cannibalization?
Maybe shoppers just shifted to KVI milk and stopped buying another milk, and that was the true reason for KVI's sales growth?

In the case of cannibalization, sales of the entire category do not increase. Sales in pieces remain approximately at the same level, as demand shifts to SKUs with a reduced price.
Let's compare category sales in the control and pilot clusters of stores:

This article highlighted how profit grows, using examples of specific products. Obviously, the assortment range of any store contains much more goods. It means, the store could have more errors in the KVI strategy employment, and more pricing errors.

➜ The key takeaway is that each accurately determined product's role, each fixed pricing error leads to the growth in your store's profits.