Key Value Items are a fundamental piece of any pricing strategy within the retail or ecommerce space, it allows you to understand what items are truly important to your customers, and how those items shape your customers price perception of your store and your brand. Read more here on how Grindbyte's data platform allows you to define your Key Value Items by analysing the purchase history of your customers within your ecommerce store.
As you do research for tools and services to help you with the pricing strategy of your ecommerce store or retail business, you will frequently find competitor price monitoring tools that allow you to price match all of your competitors prices, or automatically undercut your competitor prices by X%. This is a very rudamentary approach to price matching since it essentially means that you invest in price across the board, which is erroding your margin and profits. This is strategy is not sustainable in the long run.
What separates the strategy of more sophisticated retailers is a more targeted approach to where they invest in lower prices. Instead of always matching competitors or lowering prices of all products, they put in a lot of effort to understand:
What is the price elasticity of my products? Some products react to price changes differently, e.g. some products are not price sensitive at all and show a very low volume uplift with a decrease in price, while other products can see significant volume and demand uplift from a price decrease.
Which products drive my customers price perception of my ecommerce store? Imagine your local grocery store. You probably have a pretty good idea of how much your favorite bottle of wine costs, or what the price of you Milk or Chicken is. But what about Batteries? Gift wrapping paper? Halloween Decorations? Which products are driving your choice to come back to that store and is shaping your price and value perception?
What products are most important to my customers? For example, which ones are fundamental items of their basket over and over again, that is the main driver for them coming to your store in the first place, and what products are "random" products that they pick up while browsing your site or visiting your store?
By better understanding the questions above, sophisticated retailers and ecommerce stores are able to invest heavily in a subset of important items, and potentially financing that price investment by increasing prices on other items that are less important (but still purchased) by the customers.
In the end its a win-win for both the retail store and the customer. The business is able to position themselves as more affordable but still keep a profitable business, and the customer is able to get better deals on the products that truly matters in their shopping experience.
The logic of defining what items/products/articles are most important for your customers, and what products that drives most of the customer value perception of your store, is encapsluated in the concept of KVI's or "Key Value Items". This is a methodology where you classify each product in your store with a label or score of how important this article is in regards to how its shaping your customers value or price perception of your store.
The end result is essentially a list of Article ID's with tags such as "Non-KVI" (for normal items), "KVI" for items that have been classified as Key Value Items, and often also a "Super KVI" label for exceptions or extreme outliers that the business want to prioritize extra heavily as part of their pricing strategy.
By defining this list of product - KVI tags, you are able to refine your pricing strategy and set different pricing strategies for different type of products. For example, you may define that for all your Super KVI's you want to be 85-95% of competitor price, but for your Non-KVI's (articles that customers care less about) you could position yourself as 100-125% of competitor price.
The end result is that you increase your margin and profit on the majority of your items and sales (your Non-KVI's) and you are using some of that profit to invest in improved price perception in a subset of your most prioritized items.
Grindbyte's data platform is able to analyze your order history, customer purchase behavior and other analytical data to automatically define the list of Key Value Items of your ecommerce store using the same methodology as some of the most leading retailers in the world. All you have to do is to connect your ecommerce store using one of our existing integrations (or contact us for a custom enterprise integration) and you'll have an initial view of your Key Value Items within days.
So what dimensions should you look at to understand how important an article is when it comes to shaping your customers price perception? There are an infinite amount of data points that could be taken into consideration, but some examples are:
By gathering the data points to answer these (and other) questions about your items, we are able to score your products and get a good understanding of each of these products importance for your customers across multiple different dimensions. This all feed into a final forumla that defines a single KVI score.
This is all data science, the next part is to define where you cut the line of what score is considered a KVI vs not. Is it Top 10%? Top 25%? Top 50%? Given KVI's will be used as an input for your pricing strategy, a longer list of Key Value Items will likely translate to additional price reductions/investments, because of this it is important to not be too generous. A good starting point is somewhere around Top 10% of your products according to their KVI score, while also ensuring that it includes a significant part of total sales.
A common misunderstanding with Key Value Items is that it is the same as "Best sellers". Most ecommerce platforms or systems out there will have some sort of built in definition of best selling products, but its very important to understand that this is very different from the concept of a Key Value Item.
A Best Seller is usually defined by volume sold, either because its just "the most sold product", or because its defined using Revenue which also have a volume component built into it. What this means in practice is that you are building a self-enforcing loop where you are doing price investments in best sellers, which increases the volume, which re-enforce their status of "Key Value Items", which agains drives more price investment.
If you revisit the bullet points above with examples of data points to consider when defining key value items, you can see that most of them attempt to be agnostic to volume. Volume of units sold of a product is not insignifcant, but we should not allow it to take up too much room in our scoring algorithm.
After you have defined your Key Value Items using the Grindbyte data platform, you are now able to use that as input to your ecommerce pricing strategy. For example, you could setup a strategy such as: