A GUIDE FOR PRICING STRATEGIES

Key-value Item Pricing Strategy

What is it?

A key-value item pricing strategy is a form of dynamic pricing that combines inexpensive price elastic products in combination with popular price-sensitive products. In other words, businesses have a key-value item pricing strategy when they sell one or a few popular product(s) for a very low or negative profit margin in combination with popular products that have a rather high-profit margin. The reasoning behind this kind of pricing strategy is that certain customers go to a specific store because they know that a product that they want is very cheap over there. By offering very low prices for certain key-value items, businesses are able to attract customers to their store, to whom they can upsell other products with higher margins.

How to use it?

The KVI pricing strategy is one of the most advanced strategies, however, it can bring the biggest benefits. Let us give you some examples of how you can use it to get your pricing to the next level.

Increase Revenue and Profit
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Attract more customers
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Respond to changes in demand
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THE GAINS

Benefits of Key-value-item Pricing

1

Generates more profit overall

Although the key-value item will have a lower profit margin, the business will make more profit overall by selling more unpopular products with a higher profit margin.
2

Better customer perception than competitors

With a key-value item pricing strategy, you will have a lower price than all or most competitors for a popular product. Customers will remember businesses for it and see them as inexpensive.
3

A higher margin on products that are not price sensitive

Businesses will have a rather high-profit margin on non-price-sensitive products. These products will drive a vast amount of revenue by having a higher margin.
INDUSTRY TRENDS

Who is using it?

IKEA

At their stores, they sell breakfasts that are only €2,29. By offering breakfast for such a low price, they attract people to their stores. While the profit margin on their breakfast may be nonexistent or very low, they are still able to increase their profits by selling other products that do have a much higher profit margin.

Supermarkets

A typical key-value item found in supermarkets is cheese. Cheese is a very often consumed product that is expensive in comparison to other products. When cheese is much cheaper at one of the supermarkets, more people will come to that specific supermarket because it offers cheaper cheese than the competitors. By selling other products for a higher margin, supermarkets are still able to increase their profit because people do not buy cheese only at the supermarket, but also other products.

Copy Shop

These shops also have a key-value item strategy. Most of the time, people want to copy or print A4 papers. To copy or print these is most of the time very cheap because people are looking for this when searching for a reasonably good-priced copyshop. However, the other articles and paper formats are often much more expensive and do have a higher profit margin. This is to compensate for the cheaper A4 papers.

The most common challenges pricing managers face today

  • In order to have a successful KVI strategy, the company needs to select the products that bring in the most customers but this can take a lot of time and requires different analyses. However, with the help of smart price management software such as SYMSON, the process becomes a lot more streamlined.
  • Much like the key-value items, the items frequently bought with them must have very well optimised prices for the strategy to be effective.  This process can become very time-consuming, however, with an AI price optimization solution such as SYMSON, it can be done a lot faster.
  • The process of selecting the KVIs is not a static process. So if you want to have an efficient strategy your KVIs should be revised weekly or monthly. This is where SYMSON can help with choosing the KVIs for each time period according to the changes in demand.
THE DISADVANTAGES

Disadvantages and how to handle them

Key-value items can change over time

A potential pitfall of this strategy is that the KVIs that you have selected might change rapidly. This means that in order to have a successful KVI strategy you need to constantly monitor these products and adjust accordingly.

Little margin on key-value items

On popular products businesses will have a low-profit margin, this may seem counterintuitive. However, when the right products are chosen, businesses will make up for the profit margin lost on these products with other products.

Having a relatively high stock of the key-value items

Having a high stock of KVIs will cost you money. While there is no way to get around this, businesses do know that they will generate cash flow quickly, if they are the cheapest among their competitors.
HOW TO SET IT UP

How to implement

Implement key-value item strategy in your organization

When you want to implement a key-value item strategy you will need to do research into your products and divide them into product groups which are popular and less popular and also look into their price elasticities. In an ideal situation, businesses will choose popular products that are price elastic as their KVI and less popular products as their “moneymakers”. After deciding on how to divide the products, new prices need to be set, to either be rather low for KVIs and rather high for other items.

HOW TO SET IT UP

How to implement a key-value item strategy

In  your organisation

When you want to implement a key-value item strategy you will need to do research into your products and divide them into product groups which are popular and less popular and also look into their price elasticities. This strategy can bring a lot of benefits and in order to implement it successfully we recommend following these steps:

Analyse the products that bring the most customers to your store
Look for products frequently bought with them
Predict the price of the KVIs for optimal revenue
Predict the price for the additional products
Analyse the results for both groups
If the results are positive, optimise further and apply the same strategy for all KVIs

In SYMSON

SYMSON can help you with implementing a key-value item strategy by managing the pricing process. By importing the right data, SYMSON is able to analyse the products and calculate price elasticities. In order to set this up it is advisable to follow these steps:

Make a secure data connection with your chosen systems to continuously update prices
Select your KVIs and create a strategy for them
Select your additional items and create a strategy for them
Add business rules and notifications to both strategies
Apply the strategies to the correct products
Run the pricing strategies and export your new prices
Analyse the results from your new prices and rerun the process

How to combine with other pricing strategies

A key-value item pricing strategy works best when it is combined with other insights and other pricing strategies. A mixed bundling pricing strategy, a dynamic pricing strategy or a competitor-based pricing strategy will make this pricing strategy perform better. A mixed bundling pricing strategy will enhance this pricing strategy because separate bundle prices could be created for certain bundles of KVIs with other products. A competitor-based pricing strategy is also advantageous to add because you will need to keep track of the prices of competitors for KVIs. Last, making a key-value item strategy dynamic will result in constantly updated prices for the KVI - to always offer the most optimal prices for the KVI and other products.
GET A DEMO

How to use Rules-based Pricing in SYMSON

How it works
How to combine different pricing strategies
How to get recommendations for the perfect pricing
How to track competitors

Summary

  • A key-value item pricing strategy is a pricing strategy that combines inexpensive price elastic products in combination with rather expensive price elastic products.
  • A key-vaue item pricing strategy generates more profit, is better for customers' perception and has a higher margin on price insensitive products.
  • A key-value-item pricing strategy performs best when it is made dynamic with the help of pricing software.

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