Let's start with the KVI defition. Key Value Item (KVI) is an item in product assortment that drives the value/price perception of a retailer by customers. To put it simply, KVIs are the products the prices for which are most often compared by consumers.
The proper data-driven KVI pricing strategy can hardly by overestimated in modern retail. The reason is that the effective KVI pricing can become a retailer's shortcut to an unprecedented sales boost and increased popularity among consumers. At the same time, disregarding the essential KVI price meaning as well as misinterpreting the product roles and cross-dependacies in the portfolio can result in lost profits and undermined customer loyalty.
According to a recent survey by PwC, 44% of respondents weekly shopped in brick-and-mortar stores in 2018, up from 40% in 2015. Besides, only 21% of those surveyed as part of a recent study of the US retail market stated that they are primary online shoppers.
Although offline shopping still holds the field, customers tend to use digital tools to make their shopping experiences more rewarding in terms of a better price offer, delivery time and payment options.
The eCommerce market is expected to keep growing and account for no less than 17.5% of total global retail sales in 2021. With retail becoming more digital, businesses should harness the following emerging trends when dealing with KVI and KVC:
Put it simply, an effective KVI retail strategy is based on data-driven insights revealing the true KVIs in a retailer's portfolio and their cross-dependencies with the products. Being aware of which particular item is a true KVI and how it is connected (often implicitly) with the other products in the portfolio, a retailer can set the optimal prices for both products so it would satisfy customers' expectations and maximize sales at the same time. As, you can see it's not enough to know the KVI definition.
Here is an example of how it works. Let's say, that a chocolate bar is a retailer's true KVI, ie customers either consciously or unconsciously compare the prices in different stores for this particular chocolate bar and so their price perception is being formed. Besides, a retailer knows that the sales of this chocolate bar are directly connected with the sales of a particular type of peanut butter. It means that a large group of consumers buy these two items in a bundle while, contrary to chocolate, they do not compare the prices for peanut butter in other stores. Eventually, a retailer can sell the chocolate bar at the most attractive key value item price while setting a higher margin for a peanut butter price.
Properly defined and organized KVCs and KVIs, along with several other key elements underpinning well-balanced pricing decisions, bring increased customer engagement and loyalty, and profit. It also allows you to manage your sales targets, such as turnover or margin, and achieve their balance better. However, finding true KVI meaning in retail is a non-trivial task.
In our opinion, each type of SKU has its own journey – with its unique solutions and management approaches. To find true KVI meaning in retail, you need to understand the structure of the product basket and correctly assign other products to categories that require different repricing strategies.
At Competera, we offer to carry out segmentation by ranking products taking into account price elasticity and cross elasticity, product characteristics (brand/category/...), sales statistics, analysis of competitors' influence, etc. To find KVI examples, we use deep learning bespoke algorithms and a two-staged approach. Learn more about this technology here.
Once retailers realize what is KVI in retail, they have to enlist KVCs, or categories which are the most attractive to customers, and KVI examples, or products in these categories which drive perceived value the most, and adapt them by price zone or geography. Then they set optimized prices for the selected products based on competitors’ pricing, their current objectives, including target market share and profit targets, and price elasticity.
In addition to pricing, KVCs and KVIs are managed differently from other products in terms of space allocation and layout of product setting, marketing and promo activity.
To keep a pricing strategy optimized, retailers need to refresh their KVCs and KVIs as often as possible.
How do retailers decide what is KVI and which items to include in the lists? The decision is usually made basing on the three following factors:
There are four types of KVIs:
To make the most of the trends, McKinsey is offering several ways of transforming KVIs selection approach:
Flexible data-powered KVI management enables retailers to rapidly react to market changes and cater to customers’ needs before competitors, thus leading to a significant increase in revenues.
A key-value item pricing strategy is a sophisticated pricing strategy that implies linking the prices for inexpensive price elastic products with the prices for rather expensive, yet also elastic and cross-dependant items in a retailer's portfolio.
The data-driven use of a key-value item pricing strategy enables businesses to generate more profit, as well as contributes to a better customer perception of a particular seller. Eventually, a key-value item pricing strategy also allows for safely setting a higher margin on price-insensitive products.
Understanding KVC and KVI meaning is essential for creating a winning pricing strategy since they are core products for which retailers set prices. In the modern digital retail environment, where competitors employ data collection and price optimization software, while customers use online resources both to shop and gather information about products, businesses need to embrace every opportunity provided by technology to make sure their offers are as flexible and personalized as possible when forming the KVC and KVI lists.