Pricing Elasticity 101

Price elasticity is a wonderful equation.  When you Google it, you get a lot of equations that look like this:

E_d = \frac{\frac{P_1 + P_2}{2}}{\frac{Q_{d_1} + Q_{d_2}}{2}}\times\frac{\Delta Q_d}{\Delta P} = \frac{P_1 + P_2}{Q_{d_1} + Q_{d_2}}\times\frac{\Delta Q_d}{\Delta P}

Isn’t that the writing they found at Roswell, New Mexico on the Alien ships? I am also fairly sure I went to a party during my younger days at a house that had many of those symbols over the door. But that’s a different story.

To be honest, I think that might be way over complicating the simple idea of elasticity.

  

So much easier to think of it this way— if you think of elasticity in between these 2  graphs, all pricing should fall in there somewhere.

The simple math is if the price increase and unit fall behave in lockstep (or worse, units fall disproportionately to the price change), that’s elastic.  If the the units fall less than the price increase, that’s inelastic.  And that’s where the money lies.

Identifying these items is often difficult, as some degree of what-if has to take place. But in a perfect scenario and all other factors being equal,  if you raise price and units don’t fall (inelastic) then you make more profit.   If you raise prices and the unit fall % is greater than the increase in profit kept, your elasticity was too high, and you lost money.

The math is easy; the execution is what is actually much harder.  Consumer behavior is a fickle science, and small ripples cans make large waves.  If the consumers feel the price is too high for the situation (whatever that may be) they will not shop.  This applies to a grocery store, a web site, any transaction-based environment.

My concern is if the unit loss leads to intangible losses: What are the ‘pull items’ from a basket analysis that also may fall, with the law of unintended consequences rearing its ugly head.  If you raise cigarettes, and you gain extra money but lose units, and the change proves to be inelastic, that’s great! Units fell 2%, and transactions fell 2% but revenue and profit up 5%.  BUT- before you pat yourself, what about the sales WITH the cigarettes- Lighters? Gum/mints? Any change to behavior in these? Whats the avg UPT of a transaction involving the item. If the add-on item is not impacted greatly, or the net is still positive, that’s a winner.  The point is to look outside the box to be sure you are right and not just do analysis in a vacuum.   If the results of the total store, and the total transactions, and the total profit is increased, then the move was genius. Someone once said “Analytics Drives Business.” Enjoy the fruits of this! And then find the next inelastic item to glean profit from.  They are out there, filling your shelves, your website, your stock rooms.
Too low, too high, Goldilocks pricing?

Retail is an imperfect circle. Remember your 3 R’s- Right product, Right time, Right price- and all 3 factors are critical.  A great product late is no better than a bad product, and a incorrectly priced item negates the first 2 every time.

-THAT Planning Guy

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Monday Morning

What does that conjure up in your head? Dread?  Oh God another Monday… What will be waiting for me today….
WRONG. A whole new set of data to tear into.  Truths to be uncovered.   Answers to be revealed,  and business to be driven. 
Anyone can fix a problem in hindsight.  What separates the winners from the losers is fixing it in real time, or near real time.

Identify. Analyze.  React.  Repeat.

I challenge all my Data Nerd brethren to BRING IT on a Monday. 

#analyticsdrivesbusiness

-THAT Planning Guy

Weekend Update

A few things to comment for the weekend:
This week, in the same day, I said something was as ‘goofy as a left-handed join’. (if you don’t get that reference you may be on the wrong site) I also commented “Yo Dre, I got something to say”
I quoted Ice Cube and a SQL command in the same day.   It was THAT kind of day.
In the coming weeks, I will have a lot of things to say about BI and big data ‘tools. ‘ What does data mining look like? SHOULD it be easy?
I am thinking about the update to Replenishment 101 (201?) Where to go from simple? Complex!
Also, want to explore the pre/in/post season analytics: Living in 3 seasons at the same time.
Last, soon I want to look into size/color analysis: Best practice? Timing? Whats the best time to dig in the dirt to find the answwer?

“Somewhere squatteth the toad of truth.  ”

Stay tuned!

-THAT Planning Guy

PS- for my #datanerds:
SELECT *
FROM tablename1 LEFT JOIN tablename2
ON columnname1 = columnname2
WHERE condition

Retail Bankruptcies

As Sports Authority knuckles under, I am taking pause to reflect on the 10 biggest Retail BK’s of all time, as written in this article from Fortune: Fortune Article Link

In order of assets at time of BK:
Circuit City, Linens & Things, General Atlantic & Pacific Tea (A&P),Radio Shack, Blockbuster, Borders, Sports Authority, Sbarro, Friedman’s, Brookstone.

Ruling out Sbarro, as it really is a restaurant chain and not a traditional retailer, and Friedman’s, which is a jewelry store that I am simply not familiar with,  what stands out to me is these were ALL very top or near-top of their category businesses at one point.

Circuit City was very similar to Best Buy in product and pricing. Linens&Things was sort of a small version of Bed Bath and Beyond (less Beyond, more Bed)
A&P was not just a large grocer: They had 16,000 stores in 1930– and were the largest retailer in the WORLD. (and 150+year history)
Radio Shack? Was a premier player in the PC market at the beginning- remember the TRS-80? Then you are old also. Founded in 1921, so managed to survive a few wars the Depression, and every other world-changing event for nearly a century.
Blockbuster didn’t invent the movie rental concept- but they certainly made it simple, accessible, and EVERYWHERE.
Borders? Put it next to a B&N and heck if I knew which was which.
Brookstone was the store that was FUN in the mall!

So what did these stores fail in while their rivals are still alive? Obviously a lot of reasons but the one that struck me as likely (in hindsight) was failing to adapt-or-die.
If Blockbuster had opened an online delivery, maybe they’d be Netflix.
If Radio Shack and Circuit City had figured out whatever it was that made Best Buy work, and opened enough online presence to compete with Amazon? Maybe a different story.
Radio Shack alone could have been a MONSTER- Introducing a home PC in 1977, for $600?  About the same time as that other computer maker startup, and that one turned out OK in the end.

What did B&N do better than Borders? I don’t know, but clearly neither did Borders.  I think they were both late to the online book situation, but obviously B&N survived. Adapted.

And A&P? Well that’s the scariest of all. How do you completely own a market and lose the entire company in a few decades?  Obviously competition changed.  The landscape changed.  Bad decisions must have been made.  But to have that kind of economy of scale and lose it is just a terrifying prospect for a lot of today’s market leaders.

If you don’t remember what got you there, it is hard to stay there, I think. 16,000 stores,  85 years ago.  That’s over 4000 more than Walmart has today. In 30 years, will a change in landscape not only over-through Walmart, but literally end them? Hard to fathom… but I bet A&P management in 1930 felt the same invincibility.

So today, lets all say a retail prayer for the staff of Sports Authority who likely lost a lot of jobs, and hope they can come through the other side leaner, smarter, stronger, and better able to compete. We are all retail brothers.
Note: Brookstone emerged from BK in 2014 and has continued operations, which is a joy for anyone who is at the mall and wants a chair massage!
Plan, execute, and analyze. Repeat.  And never stop. Never.

-That Planning Guy

Great Service

What makes for great service?  Yesterday I ranted about Starbucks… Today I went to my usual Starbucks and did my usual mobile order.   When I arrived,  one of the ladies saw me,  walked over and handed me my coffee  (with a green stopper thing !) “Here you go Steve”.  Super friendly smile and all.  And the coffee was exactly as I ordered,  of course. Mobile ordering is a godsend.
If that happened every day,  I would consider that GREAT service.
Is Good service,  delivered consistently,  the same as Great service?  I believe so. 
When we ‘deliver’ a report (flash for a manager,  sales by item for a stock host to replenish a floor,  WOS with orders needed already calculated to a buyer,  etc. ) and it comes as expected,  on time,  and accurate,  is that great service? 
If you miss a day,  or the service level drops for a day ( report server failure,  or no one made my coffee! )  the exception makes for bad service. 
So the reverse must be true. 
Be great,  but be great EVERY DAY.

-THAT Planning Guy

Replenishment Failure

My Starbucks ran out of stoppers this morning.  The stupid green stick that keeps my coffee from spilling all over my car.  Wow.
Is it hard to keep in stock of an item that you give away?
Demand= cups X ratio,  where cups = sales fcst X (% hot beverages to sales)
Ratio = average #stoppers given/cups used. 
If you know the sales fcst,  which I bet they do as they likely use for labor fcst  the rest is MATH:
Assume sales is 100, 000 for a month.   (no idea,  made that up)
70% are hot beverages with a price of 4.00. Half of people ask for stoppers.
Demand =((100000 X 70%) /4. 00) X  1/3.  =8750 stoppers needed.   Build in some safety stock to account for lead times.

Now I have to clean coffee off my car seat because someone failed at replenishment.
@starbucks – no charge for this demand forecast lesson. 

-THAT Planning Guy

Relationships

Building a relationship takes a huge amount of time and effort no matter what part of your life.  Girlfriend,  wife,  child,  friend are all difficult enough to manage. 
Work relationships are also a challenge.   NO,  not the Demi Moore “Disclosure” kind of issues… The productive work relationship,  especially from a Planner. 
In Maslow’s Hierarchy of Needs,  you move up from Physiological  through love eventually to self actualization. 
Planning relationships go from:
KNOW : I know that person. Email relationship or phone call.
LIKE: yeah,  she always gives me reports and important data.
UNDERSTAND: I see your perspective and know why you think I need to markdown,  or order less. But I may not AGREE or execute.
TRUST: I believe you.  I will cut receipts and it won’t effect sales.

When you reach the level of trust,  the partnership can flourish.  Until then,  it’s generally one sided.  

How do we get there?  That’s another article entirely.
To be continued…

-THAT Planning Guy

Time in the day

If you don’t plan your time,  someone else will. 
This old adage is certainly true for Data people (I like that phrase to cover everyone from analyst to planner,  allocater, Data Scientists,  whatever your taste  may be)
If you leave time ‘open’  someone else will fill it with things they need.  
Is this the best use of time?  Whose priority is more important to accomplish?  If it’s  not your priority,  why are you spending your time?
Time is not replenishable.

Disney Dynamic Pricing?

If anyone hasn’t heard yet, the new Disney pricing strategy started today. I have to say I am shocked more people haven’t been shocked by this. imagine, pricing being reflective of demand? Who’s next, airlines, hotels, movie theaters?  All already doing. Restaurants? Do you think the lunch portion is REALLY that different?

The questions is, who isn’t doing some degree of dynamic pricing.  Everyone should.    Demand, in its simplest, is what a customer will pay.

Applaud their innovation.
Forbes article here: LINK