10 Steps to Successful Online Grocery – Chapter 2: Assortment and pricing

In this chapter we discuss the area of your on-demand business that requires the most strategic planning: assortment and pricing.

The economics of online category management generally follows the basic principles of retail category management. However, there are certain product categories more suitable for on-demand, which causes that your online and offline assortment shouldn’t be treated as a mirror image of each other. Aiming to extend the so-called mass convenience value proposition – broad range, same prices and same promotions – to the online experience will not be optimal due to the fact that the fulfillment and distribution process needs to be taken into account when calculating profitability. This is why alternative tactics for range, pricing and promotions are recommended.

Calculating net margin contribution

To evaluate the profitability of different product groups in-store you measure the gross margins of the products. Gross margins can be somewhat misleading when applied to online because 
two products with similar gross margins can have widely different picking and distribution costs. Counting the net margin contribution (NMC) – gross margin minus picking and distribution costs – will tell you more about the profitability of your online products. The NMC tends to be the lowest in bulky items, frozen foods and non-foods, such as family packs of toilet paper, because of their lower gross profit value and relatively higher handling costs. For the same reason – bulky products are heavy to carry and frozen goods require rushing from the store home – they belong to the most popular online items. This means your job is to make sure other products with higher profit margins – fresh foods and ready meals, for example – will end up in the basket as well, by using strategic pricing and promotions.

Top 5 categories in a store broken down by percent of sales and the highest net margin contribution:

  • Grocery sales 55% is the highest amount of sales in a retail store format. The gross margin in grocery is typically 25% for dry grocery; 30% for grocery frozen food and 30% for grocery dairy.
  • Produce sales typically account for 10% of the total store sales with a 40-45% gross margin.
  • Meat sales typically account for 9% of the total store sales with a 28-30% gross margin.
  • Deli sales typically account for 5% of the total store sales with a 40% gross margin.
  • Bakery sales typically account for 2-4% of the total store sales with a 55% gross margin.

All in all, the more a store sells in these fresh departments, the more profit it will put on the bottom line.

In-store vs. online pricing


As you are creating a seamless and converged experience between your different channels, one of the important alignments you have to decide is to what extent you are going to sync your online and in-store pricing. Overall, it is recommended that prices between your different channels do not vary significantly. This is because we’ve learned that one of the biggest reasons for not shopping online is that online prices are perceived high than those in-store, and while customers value the convenience of online shopping, the majority of them are not willing to pay higher prices for the same item. With these customers, a better way to ensure your cost-efficiency are picking and delivery fees as these are concrete services all customers understand. The upside with coherent online and offline pricing is that transparency between your different touch points can be an important value-add to your customers, thereby increasing their loyalty. If you choose this strategy, it should be strongly emphasized in your marketing communications.

Higher prices can however be considered in city centers. With busy traffic and limited or no access to hypermarkets, urban customers value the convenience of home delivery and are willing to pay some extra to save the trouble of grocery shopping.

Dynamic pricing and promotions


While it might not be a good idea to set your overall online price level higher, you can ensure profitability by using other methods. As we know, different customer groups can vary significantly in terms of their shopping habits and basket value, and not all groups are as profitable to you. The profitability can be measured by basket size and the share of high margin products in the basket. Your online store provides you a great amount of valuable information you need to identify and target these different customer groups. By leveraging dynamic pricing and targeting special promotions (personalized e-circulars are a great way of doing so), it is possible to raise the basket size and increase the share of high margin products among customer groups.
One way of increasing the average order value is with personalized discounts. While it might sound counterintuitive, discounts can be used to increase profit margins if they make the minimum purchase higher than their average sale. It is known that for customers, the relative price is much more important than absolute or nominal price. In practice this means that if they are required to buy more of the same product in order to get a good discount, they don’t mind doing so, thus they are willing to spend more money.

Assortment

When it comes to assortment, there are two things that impact your profitability: the depth of your assortment and the share of high margin products in it. It is possible to start off with the same inventory as you have in-store, but because of the difference in online and offline profit margins, the online assortment should be optimized when scaling up to include enough high margin products. The depth of the assortment has a dramatic impact on efficiency of picking as large assortment takes more time to pick.
To ensure your stock is evenly sold; you are making money; and your customers are getting everything they ordered, it is best to start off with a smaller selection and expand later. The key is finding the optimal amount of products that is limited but still meets the needs of your customers well enough to make them return to your store. Performing well on the basics will help convince customers that they can at least shop online for regular stock-ups once or twice a month.

Once you have mastered the basics and are maintaining a loyal and consistent customer base, your online demand becomes more predictable. At this point you have a chance to start expanding your selection for additional shopping occasions. Broader assortments will also allow you to cater to more customer segments such as organic shoppers.

When choosing products for your basic assortment, focus on the most essential everyday items people buy every week. Pick the top moving items in each grocery category with the best profit margin from each. Gradually increase the amount of products in each group and create new subcategories.
Analyze both your in-store and on-demand inventory carefully to find out which products sell the most and how they affect your profitability. Adjust your assortment accordingly to account for seasonal shifts in consumer needs.

Naveo tip:
 When setting special promotions and campaigns, be sure to communicate the ending date of your campaigns very specifically (“The promotion is valid on orders delivered by the end of the week!”). This will prevent cases in which a customer has chosen discounted items to their online basket, but has waited until a later date to check out (campaign has ended) and is disappointed for not receiving any discount.

Your storage capacity as well as delivery methods also impact your online assortment. These are some of the issues that need to be addressed:

  • some products can’t be home delivered due to legal restrictions (alcohol, tobacco)
  • some products require special storage to protect the cold chain (fresh meat, all refrigerated products)
  • some products require special packing/storage and short delivery times (frozen goods, deli products)
  • some products might be too large to deliver (domestic appliances, multipacks)

To sum it up, when focusing on effective pricing and assortment you must:


  • Evaluate the net margin contribution – gross margin minus picking and distribution costs – of your online products
  • Use dynamic pricing, discounts and promotions to level out basket values
  • Leverage customer data to target your promotions
  • Analyze and learn from the results
  • Start off with a basic assortment and expand later
  • Match your assortment and delivery strategies

Read more about choosing the most suitable delivery method for your store in chapter 3.

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