Lack of a Demand-Centric Pricing Strategy is a Big Stumbling Block for Retailers

Best-in-Class retailers are responding to competitors including the likes of Amazon by undertaking price changes in close to real-time by using advanced competitive pricing analytics, price elasticity analysis and in some cases even using smart shelves for real-time dynamic pricing updates. Dynamic pricing takes a consumer’s perceived ability to pay for a product. On the other end of the spectrum, most other retailers are facing the wrath of unrelenting promotional pricing pressures and sub-optimal markdowns that are hurting operating profit and margin.

Lack of optimization and dynamic approaches in pricing, promotions and markdowns gets translated into loss in operating profit, gross margin and inventory turns. Despite having the knowledge that effective pricing and promotions is the key to remain competitive, both large (turnover over $1 bn.), and mid-market retailers (turnover between $100 mn. and $1 bn.), have faced challenges in such implementations.

EKN surveyed 105 softlines and hardlines retailers in November 2016 of which the larger retailers highlighted the top 2 challenges as (1) lack of actionable pricing & promotion analytics to drive profitable decisions and (2) inability to measure pricing or promotion effectiveness and financial impact. For mid-market retailers, the main challenges faced are (1) increased vendor costs and ineffective vendor negotiations and (2) inability to connect pricing, promotions and markdown approach to a company strategy. It is quite evident that large and mid-market retailers are struggling to connect the dots between pricing and promotion effectiveness and profitability.

Is a more dynamic pricing approach the answer to the retailers’ problems? Retailers have tried to adapt themselves in this dynamic environment by resorting to frequent in-store price-related changes which range from ‘once a day’ to ‘hardly ever’. Large retailers resort to more frequent in-store price changes as compared to small and medium retailers. Almost a third (28%) of retailers resort to 2 times per week or even more frequent price changes per week. Large retailers are more agile to price changes for both in-store and online channels. 4 in 10 large retailers plan to increase price changes in the stores by frequency (how often a product changes prices) and volume (number of products with price changes).

On the mid-market retailers’ front, they plan to spend more than large retailers on pricing & promotions in the coming year to ensure that they do not lose out to the likes of Amazon and large retailers. Most large and mid-market retailers acknowledge that they need to spend more or the same amount as last year to remain competitive and meet their business objectives.

So, how do the retailers see themselves being equipped with sufficient capabilities to dynamically manage pricing & promotions? Is the use of advanced analytics for predictive and prescriptive pricing and promotions going to gain momentum?

In-depth competitive pricing trends analysis remains the top capability that both large and mid-market retailers plan to use in the next 12 months. Competitive analysis requires deeper and faster category and SKU-level insights from multiple structured and un-structured data sources for competitive pricing, offers and markdowns.

Interestingly, mid-market retailers have emphasized that conducting price elasticity analysis is an effective tool for dynamic pricing and promotions while large retailers still consider adopting capabilities around 1:1 promotions and making offers effective. Larger retailers will invest more in areas such as “localized pricing and promotions, system integration of pricing, promotion, and markdowns and dynamic pricing” in the next 12 months. This means that compared to today, retailers will lay greater emphasis on customer segmentation and deeper, more dynamic and personalized pricing as a result. Undoubtedly the intent is there; however, both large and mid-market retailers have a long way to go before they can claim to have achieved optimal pricing and promotions.

From a technology standpoint, nearly half (48%) of retailers are currently upgrading their promotions management/optimization capabilities or have planned replacement in the short run. While 18% have identified the need for such an upgradation. Similarly, on the price management/optimization front, the numbers are 42% and 20% respectively. This shows that a fair majority of retailers are either still upgrading or planning to upgrade their pricing and promotions management/optimization capabilities.

The following four approaches below can help retailers respond to consumer demand more effectively by developing targeted and dynamic pricing approaches:

  • Implement real-time data gathering from various traditional (e.g. POS) and non-traditional sources (e.g. social, Wi-Fi, others) and the use of such data to derive more actionable accurate pricing and promotional insights across all stores (both large and small)
  • Conduct deeper customer segmentation using advanced consumer behavior and basket analysis so as to better understand the relationship between demand and price/promotions at a local store level
  • Offer personalized pricing and offers by ranking consumer preferences and propensity to spend/consumer that leads to deeper alignment between inventory buys, sell-through pricing and promotions
  • Prior to any full-scale roll-out, enable dynamic pricing in a few categories to weigh the impact on the operational and systemic processes. Dynamic pricing has emerged a top 5 investment area for retailers. This pricing technique meets higher expectations of personalized pricing and offers from consumers. Demand-driven pricing can also benefit retailers as dynamic pricing requires highly agile and segmented pricing data computing to react in time to market demand trend shifts.

For further discussion on retail and consumer industry topics, please contact sanand@ensembleiq.com