When hosting a dinner party, the dishes that people look forward to the most can make or break the entire meal. In business, Key Value Items (KVIs) have that same power. These are the products customers specifically look for and judge your offerings by. Correctly pricing KVIs is important for maximizing sales, setting a good impression, and building trust with customers. In this guide, we’ll explore how to identify and price these signature items of your business so customers leave satisfied every time.
What is the KVI pricing strategy?
A key-value item pricing strategy is a form of dynamic pricing that combines inexpensive, price-elastic products with popular, price-sensitive products. This allows retailers to shift prices up or down according to customer demand and maximize profits without sacrificing sales volume.
The Key Value Item (KVI) Pricing Strategy is a nuanced approach to pricing that recognizes the influence certain products have on customers’ perceptions of a brand or store. Businesses may use a key-value item pricing strategy to sell one or a few popular products for a low or negative profit margin. This is done to attract customers to their stores who can then be upsold on other products with higher margins. Key-value items are those products whose demand is more sensitive to price changes, as customers have a clear expectation of what they should cost based on comparisons and past experiences. By carefully selecting and appropriately pricing these key value items (KVIs), businesses can more effectively tailor their price strategies to appeal to customers and increase sales.
Examples of brands using KVI pricing to boost revenue
Walmart, known for its “Everyday Low Prices” strategy, has often used KVIs like milk, bread, and eggs to draw customers into their stores. By offering these essential items at competitive prices, they not only drive foot traffic but also increase the likelihood that customers will purchase other items during their visit. This strategy has been instrumental in positioning Walmart as a go-to destination for affordable shopping.
Starbucks signature drinks, like the Pumpkin Spice Latte or Caramel Macchiato, are Key Value Items (KVIs). With a cult following and competitive pricing or seasonal promotions, these items attract customers to Starbucks outlets. Not only do customers buy the signature drinks, but they often purchase related products like pastries or sandwiches too.
Amazon, the e-commerce giant, often uses best-selling products as key value indicators (KVIs) to entice customers to make additional purchases. Through discounts and bundling deals on books, gadgets or household items and many more, they capitalize on the “add to cart” mentality.
Understanding KVIs and KVCs in Retail
Price strategy is about optimizing value perception and business results to maximize customer engagement and loyalty. Key Value Combinations (KVCs – the categories that have higher mix of KVIs and drive value perception) and Key Value Items (KVIs – the list of items that drives the value perception the most) are essential tools in creating an effective price strategy, as they help identify the channels, customers, products, and pricing that will deliver the most success for your retail business.
While evaluating different types of pricing strategies, retailers often ask these questions:
- What is the desired pricing position vs competitors in the same category, channel, and geography?
- What is the best price-promotion mix per category and channel?
- What factors influence value perception?
Further they use Key Value Contributors (KVC) and Key Value Items (KVI) lists to guide item-price decisions against reference competitor price indexes. These decisions are based on the competitive landscape and customer sentiments in the geography, as well as the specific product category. Not only this, KVIs are often treated differently than non-KVIs when it comes to other merchandising levers such as in-store space allocation, safety stock position, promotional activity and marketing activity.
But how do retailers determine which categories and items become part of KVI lists?
- By evaluating and prioritizing category and item-level performance, including sales and the number and size of baskets, as well as the product, demand elasticity, and market share.
- By identifying the categories and products that have the most influence on value perception through primary research.
Based on these inputs, retailers can establish four types of KVIs as suggested by McKinsey, each serving a different purpose in supporting the retailer’s overall pricing strategy:
- Value-perception drivers: These are memorable items that have a long-lasting impact on customer perceptions of value. For example, in a grocery store, bananas and milk might fall into this category, while in apparel retail, basic T-shirts or socks could be considered value-perception drivers.
- Assortment-perception drivers: These items highlight a retailer’s expertise in offering a distinctive product selection. For example, specialty electronics retailers may emphasize remote-control toy cars.
- Traffic drivers: These are high-velocity Items that move quickly and encourage more purchases. For example: diapers.
- Basket drivers: These are low-velocity goods that prompt additional purchases during a shopping trip. For example, 16-ounce spaghetti sauce, which encourages purchase of pasta, vegetables, and meat.
How KVI pricing has evolved over time
KVIs have been used by retail companies for a long time, but the approach has significantly shifted in recent years with changing trends in customers’ shopping behavior. Before we dive deep into what changed, let’s have a look at how KVIs have evolved over time.
| Traditional KVIs | Modern KVIs |
|---|---|
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Static list of items |
Dynamic list with multiple segments
|
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Identified and refreshed once in a year
|
Varies periodically based on various factors
|
|
Every KVI is treated as relevant
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Only selected KVIs are considered per category
|
|
KVI index relies on a fixed set of competitors |
KVI index relies on different competitors based on channel and category |
Retail and pricing are being reshaped by several trends in consumer shopping behavior. These include the rise of e-commerce, the desire for price transparency and increased demand for convenience.
The new digital retail era requires a dynamic, segmented approach to item-level pricing in order to optimize profitability. This approach should be based on a price strategy that identifies categories that matter most strategically to the retailer. Doing so can help retailers balance objectives like margin, price perception, and market share across different customer journeys – such as impulse purchase or big-ticket research purchase – without engaging in an unprofitable “race to the bottom” of continually reducing prices.
Retailers should rethink their approach to selecting KVIs in the following ways:
- Leveraging new data sources is key for digital teams to gain a deeper understanding of their customers. In addition to using traditional data such as transaction and basket data, customer price perception data and merchant judgment, there are many new sources unique to online channels that should be explored. This includes understanding user reviews, search traffic information, click-through rates, bounce rates, purchase rates as well as unstructured information such as tweets or comments on social sites. With the right tools in place teams can easily clean and extract these customer insights to inform better decisions and help the organization harness its full potential.
- To balance customer demand, competitor actions, and economic considerations, retailers will need to create a flexible and manageable number of price segments. Segmenting items into a small set of price groups (for example, KVIs and non-KVIs) is usually not enough for online shopping. To strike the right balance between convenience and complexity in managing price segments, it is important to make them granular enough that they can stand alone but not too granular as to become unmanageable.
- Refreshing Key Value Indicators (KVIs) more frequently can help retailers optimize the process of pricing and product segmentation. To do this, retailers should refine their process manually initially and then set inputs, weightings, and algorithms to apply changes in real time. Brick-and-mortar stores need to also consider building tolerances for price decoupling between physical stores and online stores as they transition away from exclusively using digital shelf tickets.
Common challenges pricing manager face today while selecting KVIs
Lack of price optimization
Optimizing item prices is a key part of any successful pricing strategy. Without well-organized and optimized prices, businesses may struggle to achieve the desired outcome from their strategy. To save time and effort, businesses use AI price optimization solutions such as FCC’s Pricing Manager to quickly and accurately adjust item prices.
Choosing static approach
If you want your strategy to be effective, you should dynamically update your KVIs on a regular basis. FCC can help by selecting the right KVIs for each time period based on market trends and demand fluctuations. This ensures that you stay informed and up-to-date with changes in the industry for maximum success.
Choosing KVI based on sales volume alone
Instead of solely relying on sales volume to choose key value items, more sophisticated retailers use advanced science and analytics to identify their most important goods. This approach involves using AI/ML to identify important goods which can also include low-volume items.
By taking this route, businesses can ensure they’re devoting more effort to promoting their best-selling products while not leaving out other potential top sellers. This can result in improved metrics to get the best return from their product selection.
Bottom up approach instead of a coordinated approach
Companies can make a mistake when implementing a KVI strategy by relying on merchants to guide their pricing decisions which lead to inconsistent pricing across the board. It’s important to use a coordinated approach instead of a “bottom-up” strategy that dictates the rules of sales.
This is because individual merchants cannot have the same insights into the sales process as companies do, and sometimes business pricing must go against resellers’ preferences for success. A unified pricing approach can be more efficient in order to get the most out of your KVI strategy.
Too many or too few KVIs
Having the right quantity of key products is essential for profitability. If every product is treated as a Key Value Item (KVI), none of them will have top value, and competition with other retailers can be very expensive. In order to be successful, businesses must determine which products they should price aggressively in order to drive sales. This involves market and product analysis, which can be time-consuming.
Smart price management software like FCC can help streamline the process by providing data-driven insights that allow brands to identify and focus on their Key Value Items (KVIs). By selecting the right KVIs, companies can create a profitable pricing strategy that maximizes their sales without sacrificing sustained profit growth.
Ambiguity between standard and promotional KVIs
Retailers should be aware of the difference between base and promotional key goods. Base key goods are products that are essential for daily use, while promotional key goods help to drive sales during promotions.
Knowing this distinction helps retailers to optimize their pricing strategies in order to meet customer demand and maximize competitive advantage. This can have a positive effect on consumer perception of prices, as well as overall profitability for the business.
Wrong Season, wrong channel, and wrong location
A universal key value item (KVI) strategy can be an effective tool for some retailers. However, it makes sense to vary your KVI depending on the location, channel, or season. For instance, retailers selling sporting goods can create seasonal KVI lists to capitalize on their items’ seasonality. Geography can also be a factor when considering different audiences’ needs and purchasing power.
E-commerce is another sector where varying KVI could be advantageous. However, It’s important to remember that too much complexity in your approach might decrease its effectiveness—focus on the right goods for the right channel. It is important to keep in mind that too much complexity could reduce the effectiveness of a KVI approach and ultimately be counterproductive.
How to incorporate KVI pricing strategy in your business
When implementing a key-value item (KVI) strategy, research into your products and divide them into product groups based on popularity and price elasticity. This strategy can bring a lot of benefits, such as increased customer engagement and better revenue. To ensure successful implementation, analyze the products that bring the most customers to your store, look for frequently bought items, predict their price for optimal revenue and analyze the results. If the results are positive, optimize further and apply the same strategy to all KVIs.
FCC can help you implement a key-value item strategy to manage your pricing process. We import the needed data, analyze products, and calculate price elasticities to ensure your business obtains maximum value from suitable pricing strategies. This allows you to optimize prices while maintaining profitable margins.
KVI management in grocery retail
In an age of tight margins and data-driven decisions, retailers can no longer afford to gamble when it comes to pricing strategy. KVIs (Key Value Items) are priced competitively and profit is distributed proportionally to ensure adequate basket profitability. However, a high-low price strategy can be employed to enhance price perception and diversify promotions and loyalty programs. This must be monitored carefully though, as manual application of this approach is unpredictable and could affect product margin and value perception negatively.
Grocery retailers can maximize profits by understanding product families and inter-product dependencies, such as pack size variations and the differences between branded and private-label items. Recognizing how customers purchase related products together can help retailers to set prices accordingly. This knowledge also allows them to attribute losses on one item to profits earned on complementary products within the same family.
They can use competitive intelligence and pricing tools to tap into more price-competition opportunities. To optimize their promotions, it is important to spotlight successful products, phase out underperforming ones, and pinpoint unique brand opportunities.
KVI management in apparel retail
The apparel sector presents a unique complexity due to the sheer number of brands available. When selecting KVIs, carryovers – such as plain t-shirts and straight jeans – remain consistent across seasons. It’s important to keep these items in stock while excluding them from promotions. Whereas, new season KVIs, often trend-sensitive and stock-limited, require strategic product positioning; categorizing as entry level, standard, or premium while choosing price anchors in each category can help build clear price awareness. This strategy also boosts sales of trend-dependent items when used in conjunction with an effective digital marketing strategy that allows for control over both pricing and stock management.
In multi-brand settings, competitor-based pricing requires careful consideration of the Key Value Items (KVI) list for accurate comparisons. This is key to maximize seasonal sales. To achieve optimal results, apparel retailers should focus on enhancing their digital market presence, recognizing product roles in the market, discerning genuine competitors, and implementing intelligent promotional strategies.
How to combine KVI pricing with other pricing strategies
A key-value item pricing strategy works best when it is combined with other insights and pricing strategies. Combining this strategy with a mixed bundling pricing strategy, dynamic pricing strategy or competitor-based pricing approach can take it to the next level. A mixed bundling strategy allows you to create separate bundle prices for certain KVI bundles with other products. A competitor-based approach helps you keep track of competitors’ prices for KVIs, while a dynamic approach ensures always updated KVI prices that offer the most optimal prices for them and other products.
Conclusion
In the ever-evolving retail landscape, mastering the Key Value Item (KVI) pricing strategy is essential for businesses aiming to optimize sales and build lasting customer trust. Understanding and implementing tailored KVI strategies for specific industries such as grocery or apparel can help retailers effectively balance customer demand, competitive pricing, and profitability.
Flipkart Commerce Cloud, a complete retail media solution, stands at the forefront of helping businesses optimize their KVI strategies. Harnessing advanced analytics, insights, and real-time data processing, our team provides data-driven and customer-centric pricing decisions designed to increase profitability and enhance customer satisfaction. Unlock the full potential of your KVI Pricing strategy with FCC today!
To know more about how FCC can help, book a free demo with our retail expert!