Executive Summary

The aim of the project is to identify the factors that will have an influence on sales and find the optimal price
for Nick’s Grocery. Regression analysis is carried out and Semi-Log model is chosen to evaluate the
relationships among the various factors and sales, and then the optimal price is calculated. From the
perspective of both statistic and real-world experience, it is recommended that Nick’s Grocery adopts $3.19
as the optimal retail price for Tropicana 64 ounces in the 105th week. This would help them increase gross
profit by 33.1%.

Introduction and Background

Nick’s Grocery is a newly-developing grocery brand in the mid-west market. To better manage the existing
15 stores and to deepen the brand image, Nick’s Grocery has now decided to implement a uniform pricing
strategy and they want to start from the largest selling item, Tropicana.

To maintain and improve profitability under a uniform price, the past purchase and promotion data of each
store in the last two years of Nick’s Grocery needs to be analyzed. The objective is to find out the most
appropriate uniform price points for all the stores selling Tropicana 64 in the 105th week using a best fitting
pricing model.

Data and Methodology

A dataset named Tropic which has 1560 observations for a period of 105 weeks (2 years) across 15 stores (2,
14, 32, 52, 62, 68, 71, 72, 93, 95, 111, 123, 124, 130, 137) has been provided. Nick’s Grocery stores initially
made pricing recommendations at the chain level, but now the retailer wants to standardize the price of the
same item sold in all 15 stores in order to achieve a more uniform price image. The current wholesale price
for Tropicana 64 oz. is fixed around $2.57 per bottle. The retailer wants to maximize the gross profit of
Tropicana 64 oz. Therefore, to achieve this objective, it is necessary to analyze the effect of the different
variables on Sales.

The dataset was run through SAS software. In addition to the price, week, store and deal variables, few other
variables were created. The performance in each quarter was analyzed by creating dummy variables Qrt 1, Qrt
2 and Qrt 3 with the fourth quarter being the baseline model. Similarly, the codes of the Stores have been
converted into dummy variables to capture their effects in the model. (‘2’- Store 1; ‘14’ - Store 2) (Refer
Appendix I for dummy variables). Also, one of the strategies that retailers frequently adopt is using prices
ending with 9 to create a perception of being cheap. This factor has been captured in the model using the End9
variable.

In order to identify the optimal retail price for Tropicana 64 oz. it is necessary to run a regression analysis to
capture the effects of different variables on Sales. The following three regression analysis were carried out:
Linear, Semi-Log, and Log-Log. Based on the goodness of fit (R2 value, Adjusted R2 value), the relationship
between the residual and predicted value, the distribution of residual value (normal distribution or skewed)
the best fit among the three models is chosen (Refer Appendix V for the regression models).

The linear model is rejected because of the negative non-linear relationship between residual and predicted
value, skewed distribution of the residual and poor goodness of fit (Adjusted R2=0.195). Both the Log-Log
model and the Semi-Log model have an ideal relationship between the residual and predicted value and a
normally distributed residual value(refer to Table V REG result). Based on the goodness of fit, Semi-Log
model (R2=0.48) seems to be slightly better than Log-Log model (R2= 0.46) and the price elasticity of
the Semi-log model varies with the price (b*Pt), which fits the real world business better than the constant
price elasticity (b) in Log-log model. Thereby, Semi-Log model is chosen for evaluating the optimal price.
Key Findings

Based on the weekly sales dataset of 15 Nick’s Grocery stores, the results show that Tropicana 64 ounces is
sold from $2.74 to $4.18, which averaged about $3.6 from 2009 to 2010 and weekly sales volume averaged
about 40914.54 ounces, with a range between 2112 ounces (store 71 week 33) and 1186496 ounces (store
71 week 58). Since the wholesale list price is expected to stay at $2.57 per bottle, the most profitable pricing
in the past 2 years was $3.09 in store 71 week 58, which also brought the largest sales volume(1186496 ounces)
without deal. And the least profitable pricing was $3.24 in store 14 week 88th, at which the store sold 2304
ounces with deal. What’s more, the sales and price have no significant differences among stores and weeks.
Details of descriptive statistics are shown in Appendix I&II. Clearly, either price, sales volume or deal is not
the only determinant of profit. Semi-log model is then used to explore the effects of each of these variables.

The pricing model is as follow:

Ln Sales=α +store1*β(store1)+store2*β(store2)+store3*β(store3)+store4*β(store4)+store5*β(store5)
+store6*β(store6)+ store7*β(store7)+ store8*β(store8) +store9*β(store9)+ store10*β(store10)
+ store11*β(store11)+ store12*β(store12)+ store13*β(store13)+ store14*β(store14)+
+price* β (price)+deal* β (deal)+end9* β (end9)+week* β (week)
+qrt1* β (qrt1) + qrt2* β (qrt2) +qrt3* β (qrt3)
where α is the intercept, store15 and qrt4 are baselines. The parameter estimates are shown in IV Model
Description.

The REG Procedure output result (refer to Appendix.III. Correlation Result ) shows that the p-value of all the
variables is less than 5%, which indicates that all the variables are statistically significant and have varying
degrees of contribution to sales volume. After thorough analysis of the results, the following key findings are
inferred:
• Sales volume has a negative linear relation with price in a parameter of -1.536, which means
whenever price increases by 1 unit, sales volume will decrease by 78.4% (e-1.536-1)*.
• Sales volume has a positive linear relation with price ending with 9 in a parameter of 0.187,
which means whenever price ends with 9, increase by 1 unit results in increase of sales volume by
20.6% (e0.187-1)*.
• Sales volume has a positive linear relation with in-store display and/or feature advertising in a
parameter of 0.081, which means whenever in-store display and/or feature advertising happens, sales
volume will increase by 8.4% (e0.081-1)*.
*Rate= (New Sales-Old Sales)/Old Sales

In theory, according to semi-log model optimal price formula (P*=Ct-1/b), the optimal retail price for
Tropicana orange juice in week 105 should be $3.22. However, considering price ending with 9 has a
significantly positive impact on sales volume, the adjusted optimal price should either be $3.19 or $3.29.

According to profit analysis (refer to Appendix VI Profit Analysis), when retail price is $3.19, Nick’s Grocery
will obtain a gross profit of $11,049 and a growth rate of 33.1%; when retail price is $3.29, its gross profit
will be $11,003 and its growth rate will be 32.5%. As the result, $3.19 should be the best retail price for
Nick’s Grocery to reach the maximum profit of $11,049 and growth rate of 33.1%.

Conclusions and Recommendations

Conclusions
After testing the correlation among the variables, the results show that quant has a positive correlation with
price, deal, and store. And based on the real-world observations and experiences, it has been determined that
end9 and quarter factors will also affect the sales. Therefore, price, deal, store, end9, week and quarter are
chosen as the independent variables to figure out their relationship with quant.

Through pricing model evaluation and comparison, Semi-Log Model is the most appropriate one under this
circumstance. All the independent variables have a significant influence on quant, which means a clear picture
of sales can be drawn and be used to make reasonable recommendations. First of all, when price increases,
sales will decrease; the interesting fact about price is that price ending with 9 will create a positive influence
on sales, which can be explained from customer’s psychology aspect. Secondly, there is a positive relationship
between deal and quant; when promotion happens, sales will increase. Thirdly, there is another positive
relationship between week and quant. To be more specific, the sales of Tropicana 64 ounces increases with
weeks and has the highest value of sales in the first quarter.

Using this pricing model, profit analysis is done under three possible prices -- $3.22, $3.19, $3.29. And through
comparison of profit, $3.19 is the optimal retail price for Tropicana 64 ounces in the 105th week.

Recommendations
Three major recommendations are made according to the analysis:

● Deal should be tracked by week, the correlation might be more significant, more research is required.
If the store has a deal on week 105, they will get more profit hence, putting up a deal in week 105 can
be a practical option.

● The store 71 acts as the outlier. Therefore, the actual reason of store’s best (week 58) & worst
performance (week 33) needs to be explored. There might be external factors such as competitive
stores in and around Nick’s, economic factors, changes in the price of raw materials etc.

● If store sets the price ending with 9, there is a max of 33.1% increase in profit when the price is $3.19
compared to 32.5% increase in profit when the price is $3.22. Profit of week 104 is considered as base
for comparison. Therefore, keeping price ending with 9 is an option quite considerable. (refer to
Appendix VI. Profit Analysis).

Limitations
Firstly, Nick’s Grocery has considered no deal in the 105th week so the team set internal limitation to the
results as we know few things about the details of deal. Secondly, the model has a limitation that it does not
perfectly fit the data with outliers. Thirdly, the variable costs are not considered here, which might contribute
to a huge difference in profit calculations. Finally, we have not considered the competitor’s effect in the model
as we do not have any information related to it.
Appendices: Tables, Exhibits, Figures

I. Variables Description

Variable Type Variable Name Description

Unique code for each store

STORE (2, 14, 32, 52, 62, 68, 71, 72, 93, 95, 111, 123, 124, 130, 137).

Ranges from 1 to 104,

1 = the first week of January 2009, and 104 = the last week of
WEEK December 2010
Independent
QUANT Weekly sales volume in a store, measured in ounces

PRICE Retail price for Tropicana 64 oz., measured in $/bottle.

In-store display and/or feature advertising.

On display and/or feature ad=1; on neither display nor feature
DEAL ad=0.

Range from 1 -4,1=weeks in the first quarter,2=weeks in the

second quarter,3=weeks in the third quarter,4=weeks in the
QRT fourth quarter

Prices that end with 9

END9 1=price ends with 9,2=price does not end with 9
Dependent
LQ Log of Quant

LP Log of Price

Numerical Order of each store,

STORE1-
Store1=Store’2’,and store14=Store’130’,Store’137’ is the
STORE14
baseline

Dummy Variables

qrt1=0; qrt2=0; qrt 3=0;

if (week>=1 and week<=13) or (week>=53 and week<=65) then qrt1=1;
if (week>=14 and week<=26) or (week>=66 and week<=78) then qrt2=1;
if (week>=27 and week<=39) or (week>=79 and week<=91) then qrt 3=1;z
store1=0; store2=0; store3=0; store4=0; store5=0; store6=0; store7=0; store8=0;
store9=0; store10=0; store11=0; store12=0; store13=0; store14=0;
if store=2 then store1 =1; if store=14 then store2 =1;if store=32 then store3 =1;
if store=52 then store4 =1;if store=62 then store5 =1;if store=68 then store6 =1;
if store=71 then store 7 =1;if store=72 then store8 =1;if store=93 then store9 =1;
if store=95 then store10 =1;if store=111 then store11 =1;if store=123 then store12 =1;
if store=124 then store13 =1;if store=130 then store14 =1;
II. Descriptive Statistics under All Observations

Variable N Min Q1 Median Q3 Max Mean Std Dev.

quant 1560 2112 13824 27360 51680 1186496 40914.54 49216.14

price 1560 2.74 3.34 3.59 3.84 4.18 3.6021218 0.3507742

deal 1560 0 0 1 1 1 0.6955128 0.4603375

lq 1560 7.6553906 9.5341615 10.216836 10.852825 13.986515 10.2378992 0.8559398

lp 1560 1.0079579 1.2059708 1.2781522 1.3454724 1.4303112 1.2766972 0.0987787

qrt1 1560 0 0 0 0.5 1 0.25 0.4331516

qrt2 1560 0 0 0 0.5 1 0.25 0.4331516

qrt3 1560 0 0 0 0.5 1 0.25 0.4331516

end9 1560 0 0 0 0 1 0.2455128 0.4305289

III. Correlation Result

Pearson correlation coefficient, , N = 1560

Prob > |r|, H0: Rho=0

quant price lp lq end9 deal store qrt1 qrt2 qrt3

-
-0.3824 -0.3786 0.75669 0.02439 0.10467 0.1089 0.16661 -0.0425
0.07204
quant 1
<.0001 <.0001 <.0001 0.3357 <.0001 <.0001 <.0001 0.0044 0.0931

-0.3824 0.99859 -0.6362 0.072 -0.3425 -0.0394 -0.1656 0.16411 0.04223

price 1
<.0001 <.0001 <.0001 0.0044 <.0001 0.1198 <.0001 <.0001 0.0955

-
-0.3786 0.99859 -0.6266 0.0673 -0.3366 -0.1756 0.15559 0.04581
0.03888
lp 1
<.0001 <.0001 <.0001 0.0078 <.0001 0.1248 <.0001 <.0001 0.0705

0.75669 -0.6362 -0.6266 0.02687 0.2463 0.08113 0.12608 -0.084 -0.0047

lq 1
<.0001 <.0001 <.0001 0.2888 <.0001 0.0013 <.0001 0.0009 0.8537

IV. REG Model and Result

proc reg;
model quant = price deal store1-store14 qrt1-qrt3 week end9; /* model1 linear model */
model lq = lp deal store1-store14 qrt1-qrt3 week end9; /* model2 log-log model*/
model lq = price deal qrt1-qrt3 store1-store14 end9 week; /* model3 semi-log model */
run;
log-log without Semi-log without
linear model Qrt1-4 Log-log Model Qrt1-4 Semi-log Model

R square 0.2059 0.4627 0.4607 0.4741 0.4811

Adj-R square 0.195 0.4565 0.4537 0.4679 0.474

V. Model Description

Parameter DF Estimate Standard Error t Pr > |t|

Intercept 1 15.92147 0.2039 78.08 <.0001

store1 1 -0.84167 0.08609 -9.78 <.0001

store2 1 -0.60828 0.08626 -7.05 <.0001

store3 1 -0.32561 0.08616 -3.78 0.0002

store4 1 -0.43938 0.0862 -5.1 <.0001

store5 1 -0.5454 0.08615 -6.33 <.0001

store6 1 -0.63595 0.08615 -7.38 <.0001

store7 1 -0.68151 0.08609 -7.92 <.0001

store8 1 -0.5556 0.08616 -6.45 <.0001

store9 1 -0.54498 0.08625 -6.32 <.0001

store10 1 -0.9089 0.08618 -10.6 <.0001

store11 1 -0.6123 0.0862 -7.1 <.0001

store12 1 -0.48004 0.08611 -5.57 <.0001

store13 1 -0.66697 0.08613 -7.74 <.0001

store14 1 -0.62804 0.08611 -7.29 <.0001

Price 1 -1.53699 0.04952 -31 <.0001

Deal 1 0.08074 0.0375 2.15 0.0315

qrt1 1 0.21152 0.05037 4.2 <.0001

qrt2 1 0.17588 0.04756 3.7 0.0002

qrt3 1 0.1463 0.04534 3.23 0.0013

week 1 0.00347 0.00063152 5.5 <.0001

end9 1 0.18746 0.03882 4.83 <.0001

VI. Profit Analysis

Wholesale price $2.57 wholesale list price(Ct) given

Optimal retail $3.22 in semilog, optimal price=Ct-

price 1/b(price)

Adjusted $3.19 if we follow end9 rule,the price

optimal price should be 3.19 or 3.29
 Store InSale InSale InSale week 104 prices InSale
at P = 3.22 at P = 3.19 at P = 3.29 at week 104 prices

Store 1 (code=2) 10.706 10.939 10.786 3.27 10.629

Store 2 (code=14) 10.940 11.173 11.020 3.97 9.787

Store 3 (code=32) 11.222 11.455 11.302 3.56 10.700

Store 4 (code=52) 11.109 11.342 11.189 3.76 10.279

Store 5 (code=62) 11.003 11.236 11.083 3.56 10.481

Store 6 (code=68) 10.912 11.145 10.992 3.56 10.390

Store 7 (code=71) 10.866 11.099 10.946 3.25 10.820

Store 8 (code=72) 10.992 11.225 11.072 3.56 10.470

Store 9 (code=93) 11.003 11.236 11.083 3.97 9.850

Store 10 (code=95) 10.639 10.872 10.719 3.76 9.809

Store 11 (code=111) 10.936 11.169 11.016 3.25 10.890

Store 12 (code=123) 11.068 11.301 11.148 3.27 10.991

Store 13 (code=124) 10.881 11.114 10.961 3.37 10.651

Store 14 (code=130) 10.920 11.153 11.000 3.16 11.012

Store 15(code =137) 11.548 11.781 11.628 3.14 11.671

Store1 at Price=3.22 Store1 at Price=3.19

lnSale=10.706=intercept+ LnSale=10.939=intercept+
(store1=1)*b(store1)+ (store1=1)*b(store1)+
(price=3.22)*b(price)+ (price=3.19)*b(price)+
(deal=0)*b(deal)+ (deal=0)*b(deal)+
(end9=0)*b(end9)+ (end9=1)*b(end9)+
(week=105)*b(week)+ (week=105)*b(week)+
(qrt1=1)*b(qrt1) (qrt1=1)*b(qrt1)

Expected Sales in Week 105 (in Ounces) Expected Gross Profit in Week 105

Store at P = 3.22 at P = 3.19 at P = 3.29 at week at P = at P = at P = 3.29 at week

104 prices 3.22 3.19 104 prices

Store 1 44632.2 56349.0 48320.9 41330.7 453.30 545.88 543.61 452.05

(code=2)

Store 2 56399.2 71205.1 61060.5 17809.0 572.80 689.80 686.93 389.57

(code=14)

Store 3 74772.8 94402.2 80952.7 44339.4 759.41 914.52 910.72 685.88

(code=32)

Store 4 66783.4 84315.4 72302.9 29121.4 678.27 816.81 813.41 541.48

(code=52)

Store 5 60066.6 75835.4 65031.0 35618.8 610.05 734.66 731.60 550.98

(code=62)

Store 6 54841.9 69239.0 59374.5 32520.6 556.99 670.75 667.96 503.05

(code=68)

Store 7 52376.3 66126.2 56705.1 50016.1 531.95 640.60 637.93 531.42

(code=71)

Store 8 59409.5 75005.7 64319.6 35229.2 603.38 726.62 723.60 544.95

(code=72)

Store 9 60066.6 75835.4 65031.0 18967.1 610.05 734.66 731.60 414.90

(code=93)

Store 10 41739.8 52697.3 45189.5 18201.0 423.92 510.51 508.38 338.42

(code=95)

Store 11 56174.0 70920.9 60816.7 53642.7 570.52 687.05 684.19 569.95

(code=111)

Store 12 64100.7 80928.4 69398.5 59359.1 651.02 783.99 780.73 649.24

(code=123)

Store 13 53167.9 67125.5 57562.1 42220.5 539.99 650.28 647.57 527.76

(code=124)

Store 14 55282.4 69795.2 59851.4 60623.0 561.46 676.14 673.33 558.87

(code=130)

Store 15 103591.4 130786.3 112153.1 117145.3 1052.10 1266.99 1261.72 1043.32

(code=137)

Total 903404.9 1140567.1 978069.6 656143.8 $9,175 $11,049 $11,003 $8,302

% increase over current practice: 10.5% 33.1% 32.5%