As retail executives know all too well, most pricing decisions require a trade-off between margin and price perception. To avoid a “race to the bottom”—the self-defeating exercise of trying to beat every competitor’s price on every item—retailers must hone their ability to make smart pricing investments. Indeed, the savviest retailers identify key value categories (KVCs) and key value items (KVIs)—those product categories and SKUs whose prices consumers tend to notice and remember. If a retailer can do this accurately, it can price those specific products competitively while charging higher prices on other items.
Yet, despite the importance of KVC and KVI identification, many retailers still lack a systematic, fact-based process for doing it. Some retailers rely almost entirely on the commercial intuition of experienced category managers. To be fair, a number of retailers do use data to try to isolate KVCs and KVIs: for example, they might benchmark their assortment and prices against those of discounters, on the assumption that price-sensitive consumers use discounters as a baseline for comparison shopping. Some retailers apply a simple heuristic—they use a combination of weighted criteria such as purchase frequency and brand perception to select KVIs.