Here's looking at SKU, kid! (Ok, I've been working a lot in Casablanca this year).
So, here's a sneak preview of important SKU rules we'll be publishing next month based on collaborative research with our technology partner Ugam. These rules have helped us develop our suite of analytics tools for SKU rationalisation, promotional optimisation, pricing, and category management.
There are some helpful universal rules that can support retailers in SKU ranging and pricing decisions regardless of whether you're in London or Lisbon, or you're a grocer or a DIY big box.
We're standing on the shoulders of giants, and not everything we're saying is new, but we can now say with some certainty it's true. Here goes:
- Higher customer penetration of a SKU correlates to higher purchase frequency. There are no low penetration SKUs but bought at high frequency. The potential attractiveness of niche is a myth!
- High purchase frequency of a SKU correlates to high share of category. Guess what, get people to buy a SKU more often, and it'll increase its category share...
- Higher category (volume) share SKUs display higher cannibalisation of other SKUs in the category, and so also display higher cross-price elasticity. In fact, low share SKUs have so little interaction with the category that they tend to have very low price elasticities. This likely means you can increase the prices of low share SKUs and stretch your price ladder.
- Higher priced SKUs tend to have higher cannibalisation and so in turn higher cross-price elasticity. Lowest priced SKUs have less interaction with the category, and so tend to have lower price elasticities. We've seen a lot of opportunity to hoist prices of entry price SKUs.
- Categories with lots of SKUs tend to have lower average levels of price elasticity and cannibalisation. Fewer SKUs leads to higher cross-price elasticities and higher levels of cannibalisation.
- Heavily promoted categories display higher cannibalisation but lower price elasticity than expected. Lower? Yes, it's an arithmetic effect of the magnitude of implied large price reductions from promotions.
- It's categories with stretched price ladders that show the most interesting margin boosting effects. Categories with compressed price ladders show the most margin destructive behaviour for retailers.
It's possible to use this new unified understanding of how SKUs behave, to bring joined-up thinking to ranging, pricing, and promotion decision making ... and indeed these important concepts can be embodied in decision support tools which apply universally in all countries and all types of retail.
James Walker is a partner at OC&C, and Global Head of Analytics