1. A DemAnDTeC CusTomer suCCess sTory
Managing Pricing Strategically
at FreshDirect
CusTomer overview opportunity
FreshDirect is a pure play e-commerce retailer. As such, the data available to them
FreshDirect is a leading profitable
provides a unique opportunity for competitive differentiation. “We know precisely every
online grocer in the U.S. with
purchase for every customer, and a lot of surrounding behavioral data. We also have
customers in New York, New
absolute compliance with all our pricing changes with absolutely no effort,” said Keith
Jersey, and Connecticut. It is
Vertrees, Manager, Merchandising Operations for FreshDirect.
known for its fresh-from-the-farm
foods and brand name groceries at While FreshDirect is able to offer lower prices due to its operational assets, including
everyday low prices, all delivered to some of the industries’ best food experts and a state-of-the-art distribution facility, the
customers’ doors. Every morning areas it operates—Manhattan, and the greater New York metro area—is an area of
FreshDirect’s food experts rate all intense competitive pressure.
produce and seafood, giving each
FreshDirect had a unique opportunity to leverage its data and allow it to compete more
item a Daily Quality Rating to help
effectively. Thus, FreshDirect decided it needed a price optimization solution and
customers choose what is best and
DemandTec’s Everyday Price Optimization software service on the DemandTec network fit
in-season. FreshDirect customers
the bill.
can enjoy more than 600 entrees
and side dishes, made fresh daily by DemandTec solution
professional chefs using the finest Before selecting DemandTec, FreshDirect conducted a thorough evaluation of the market.
and freshest ingredients. FreshDirect selected DemandTec for three key reasons:
n DemandTec utilizes data at the individual transaction level, enabling FreshDirect to
understand differences of individuals customers or specific zip codes.
n DemandTec provides a high degree of usability and control. Specifically, DemandTec is
extremely flexible with its ability to change and edit data within the application. Likewise,
CompAny snApshoT DemandTec makes it easy to create customer groupings on the fly, and easily write,
modify, and apply business rules at various levels within the solution.
n www.freshdirect.com
n DemandTec services and solutions are delivered in a SaaS business model, providing
n Market Sector: Online Grocery
automatic quarterly releases with new functionality common across the customer base.
n Geography: The Greater New York Thus, FreshDirect benefits from all the requests of the vast DemandTec customer base
metro area and is always on the most current release.
FreshDirect chose to deploy Everyday Price Optimization to manage pricing on an
ongoing basis. FreshDirect maintains fairly high gross profit margin targets, and the
DemandTec solution would help find products where it could capture some margin
increase based on how sensitive a product is to price changes and the competition in the
local market.
FreshDirect is known for providing high quality fresh products at reasonable prices. Its
business was built in Manhattan, and has proven quite sticky due to the mix of service and
quality of their fresh goods. In Manhattan, it is able to make up margin on things like cases
of water. The nature of consumer demand in the suburbs is quite different. In the suburbs,
FreshDirect gets customers hooked on convenience and quality which is a unique
differentiator in those markets. Using DemandTec, FreshDirect has the ability to address
the needs of the different markets and to simulate different scenarios allowing the pricing
team to see the results of a pricing decision before it ever hits their website.
www.demandtec.com

2. CusTomer suCCess sTory
more than a Client-vendor relationship
“The relationship with DemandTec is so much more than the typical vendor-customer
relationship,” said Vertrees. “DemandTec is committed to our success which is
demonstrated in large part in the form of the ongoing support we get from the professional
services team which ensures we are getting the full value from our investment.
Since FreshDirect has unique data available to them, especially in the fresh space, it has
partnered with DemandTec’s science team to leverage that data in the DemandTec models.
For a bricks & mortar retailer there is little data around the quality of produce, and what the
shopper sees impacts buying behavior. For an online retailer, the shopper experience is
very different. FreshDirect grades its produce and communicates the quality via the website.
Because of the transparent experience, that is consistent for all shoppers, they can use the
data they collect around perishables in the DemandTec models as indicators of consumer
demand. This means that FreshDirect can optimize the prices of perishable categories,
which is not the norm for most grocers. All this leads to the ability for FreshDirect to use
price optimization for perishable categories, where that is not the norm for most grocery
“The quality of our data
retailers. “We are always on the cutting edge of optimization,” said Vertrees.
provides us a unique
Gaining merchant Buy in: The Key to success
The FreshDirect pricing team had prior experience implementing a pricing solution, and opportunity to tap into the
knew that one of the toughest challenges would be gaining merchant buy-in. They knew power of price optimization.
they’d need to prove the solution’s capabilities through a test case to gain trust. FreshDirect DemandTec has proven to
chose their flagship 4-Minute Meals, which are fresh, packaged, microwavable meals with a
be the right partner for this
three to five day shelf life.
journey.”
The first step was to prove out the basic models. FreshDirect looked at prior purchase
Keith Vertrees
behavior and could see based on empirical data that the 4-Minute Meals were – in general
Manager, Merchandising Operations
– inelastic. This was consistent with what was found by the DemandTec models, and was a
FreshDirect
step in building acceptance of the new solution.
The next step was to scope out a few scenarios to test some hypotheses. The general
objective for the 4-Minute Meals category was to increase revenue and margin without
hurting units. The pricing team partnered with the merchants to scope out a few hypotheses
to test.
A key concern for the merchants was to maintain price perception. The 4-Minute Meals
were priced in buckets—$5.99, $6.99, $7.99, $8.99, and $9.99—and one hypothesis to be
tested was whether the buckets were crucial to price perception. After analyzing a number
of scenarios, FreshDirect determined that rather than changing the price of every product,
they could best achieve their goals by keeping the same price buckets and moving products
within those buckets.
Delivering results
With DemandTec, FreshDirect is now able to optimize categories, improve their competitive
position, and quickly react to cost and competitive changes—all from intuitive, easy-to-
navigate screens. This allows FreshDirect to better manage operational pricing issues,
including managing pricing relationships such as line groups, good-better-best strategies, as
well as size and brand relationships.
The project has met expectations, and those expectations were high. They have consistently
and predictably seen a lift on profit without negatively affecting units. FreshDirect has seen
a nearly 1 percent improvement to margin while simultaneously improving their competitive
position. They are fully on target to meet their financial objectives and have done so in a
predictable fashion.
DemandTec, Inc. www.demandtec.com
One Franklin Parkway, Building 910 n San Mateo, CA 94403
tel 650.645.7100 7/11