Should retailers take a centralised or decentralised approach to price and promotions?
Welcome to dunnhumby's The Science of Shopping newsletter where we look at the trends shaping the future of retail and share the top insights that matter most to retailers and CPGs. In this month's edition Luc Prud'hon explains how a centralised pricing model creates a competitive advantage for retailers and brings invaluable benefits to customers.
Why centralising price and promotion decisions makes sense in a customer-centric world
A grocery retailer's operational structure can be shaped by all manner of things: the needs of the local market, for instance, or the state of the competitive landscape. A retailer’s buying power can play a role, as can the difference between a franchise or company-owned model. These factors are always evolving, too, making structural change continual. As a result, rarely—if ever—are two retailers’ operations the same.
This complex legacy has an onward impact on pricing and promotions. Depending on their organisational structure, retailers typically fall into one of two different camps here: centralised or decentralised.
As distinct as these two models are, each offers its own benefits. Because of that, the ultimate ambition for any retailer should be to strike a balance between the two. In this article, we’re going to look at why that is—and how retailers can in fact get the best of both worlds.
Understanding the differences
While there may be advantages to each of the two models above, most retailers today follow either one or the other.
Tesco, Lidl, and Mercadona all pursue a centralised strategy, for example, helping them maintain a consistent price perception across their stores. 7-Eleven, on the other hand, takes the opposite approach. Operating under a franchise model in 20 countries—and with plans to expand to 10 more markets by 2030(1)—the retailer has very purposely decentralised its pricing and promotions.
7-Eleven's strategy has logic: it enables flexibility, which should in turn empower greater customer centricity. Store managers can leverage customer knowledge, tailor promotions to local tastes, and respond quickly to local competition and stock surpluses.
This certainly makes decentralisation sound attractive, but several caveats must also be taken into account. Local decisions may not align with company-wide goals and strategies. Different pricing strategies across departments may increase administrative costs. And buying power is diminished, preventing retailers from fully realising the economies of scale available.
Crucially, decentralisation can also lead to pricing errors and a poor pricing structure—damaging customer trust. At other times, this wouldn’t be such a problem, but the cost-of-living crisis continues. Right now, retailers simply can’t afford any damage to their brand image.
Moving towards a centralised process can improve decision making
Clearly, in spite of its benefits, an entirely decentralised approach to pricing and promotional decision making also creates risk. As such, any retailer that leaves all pricing and promotional decisions in the hands of its local teams today should consider gradually taking back at least some degree of control—not least because doing so can help to enhance value perception, too.
With a centralised pricing and promotions model, for example, customers benefit from stable and consistent pricing across locations. Any customer can visit any store without worrying they’ll find the same product for less a few streets away. There’s no disparity between promotions to confuse between branches. And centralisation increases a retailer’s ability to negotiate with suppliers, with the resulting savings then passed on to customers.
What truly stands out about a centralised approach, though, is how it paves the way for data-driven decision-making.
As one recent article reads, "centralised pricing is your competitive advantage."(2)
That viewpoint is one that we share. Having decided to centralise pricing and promotions, retailers can begin building the architecture for pricing engines. These data solutions can then optimise pricing and promotional activity in stores and across every sales channel.
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Pricing engines offer myriad benefits. They provide retailers with dead net margin visibility, a single source of pricing truth across the entire organisation, automated future pricing, and much more. In addition, with the granularity on offer, retailers can localise pricing and promotions at any time, and in a way that’s coherent with a broader strategy and doesn’t put trust at risk.
A flexible approach to ensure customer-centric prices and promotions
Before any discussions around data strategies can really begin, grocery retailers need to plan their move to centralisation from an organisational standpoint.
A degree of flexibility must be retained. A centralized pricing approach—with the ability to adapt to local demands—offers the best solution for today’s complex retail environment. To achieve this, we recommend that retailers define a price zone structure, dividing stores into different pricing categories or zones. By doing so, retailers can be customer-centric, optimising pricing based on factors that include:
Naturally, change of this kind typically requires a significant amount of work. As a result, establishing a dedicated pricing and promotional team is highly recommended.
This team can work directly with store managers formerly responsible for pricing and promotion approaches. It can build trust with managers, demonstrating the centralised approach’s results, and accelerate the transition process. Members can gain valuable local knowledge through these relationships and relay it to colleagues. Over time, the team’s pricing and promotion expertise will grow, but can also be supplemented by data and technology in the short term.
And so, while the move from a decentralised to centralised model may sound complex, the reality is that there is no need to wait. Support is available to help retailers realise value from that transition faster.
Aiding the shift towards centralised pricing
One way in which retailers can speed up the transition towards a more centralised pricing approach is to introduce a price management and optimisation solution. By providing retailers with a single platform from which to set prices across their store portfolio, solutions such as these naturally support the organisational changes required to make this evolution a success.
dunnhumby offers two pricing solutions: Smarter Prices and dunnhumby Price. Each helps retailers to manage prices centrally but flexibly, with differing levels of sophistication.
Smarter Prices—dunnhumby’s new pricing platform—focuses on the management of complex rules in all stores, enabling logic at shelf while maintaining a competitive position against the rest of the market. dunnhumby Price, meanwhile, is a customer-centric pricing platform. it gives retailers the ability to optimise prices based on their financial objective, while delivering excellent shelf-edge logic at scale and maintaining a competitive position against the rest of the market.
Learn more about dunnhumby Price and Smarter Prices — and see for yourself how they can help you tap into the benefits of centralised and decentralised pricing models alike—at dunnhumby's Price & Promotions Solutions.
1) 7-Eleven reveals strategy for entering European markets, including the UK – Better Retailing, 25th April 2024
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1wI know that the term "centralized" is used to describe centralized decision making in pricing, but perhaps it is the term which is confusing. I fully agree with dunnhumby to call for flexible - or, imo, better to say - individual approach to local pricing. While perception-relevant prices are aligned with the brand image, local competition or demographics is reflected in the local store pricing