I recently caught up with a colleague in the pricing analytics world who had moved into a leadership role at a retailer, and we discussed how to find the Key Value Items (KVIs) in his assortment.
A KVI is defined as a product that drives the perception of value well beyond the actual value delivered. The classic example KVIs in grocery are milk, eggs, and bread. Shoppers know the price of these items, and when they see a chain selling them even just a few pennies cheaper, this value drives the perception that the entire chain has better prices. So a savvy retailer will keep the price of his KVIs lower than the competition, and make up the difference across the rest of the store.
So then what are the determinants of a Key Value Item?
1) Commoditized, or at least a standardized, product.
The product must be one which a consumer considers comparable, and is therefore indifferent to where he buys it. Consumers usually don’t care whether they buy a certain book at Borders, via Amazon, or or anywhere else.
2) An existing perception of price
For a KVI to drive price perception in a store, a consumer needs to go in to the store with an existing expectation of price. Traditionally this was always from knowing the “market” price, as it is with milk and eggs to frequent shoppers, but this is changing rapidly with barcode-screening smartphone apps.
How to test for them?
First, test price elasticity.
If a product is inelastic, and changes in price aren’t influencing it’s own volume, it’s pretty hard to make the case that it’s driving perception across the store. Being elastic is necessary, but not sufficient.
Second, measure price halo, either attitudinal or behavioral.
Behavioral indicators could be increased baskets in the immediate transaction, or increased frequency, depending on the retail format and product set. Otherwise, for a more direct test of the perceptions there’s always the old standby of survey-based attitudinal testing.
But watch for the future implications
For a case study in the pitfalls of short-term thinking, it’s worthwhile to examine gas stations. Gasoline has all the characteristics of a KVI: it’s a commodity, and the large signs on the streets certainly drive home the idea of a market price. It’s definitely elastic, and numerous studies have shown that lower gas prices translates to more c-store sales. But outside of the gas companies, there are very little profits being made in the gas/c-store companies. Why? To stay competitive on gas to drive the c-store business, they’ve had to cut their margins down to the point that no one is making any money either in or out of the store. To avoid going the way of the gas station, it may be better to simply match market price, rather than beat it and spark a war.