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Price War: Retail’s Latest Self-Destructive Addiction

  • Written by  Jared Wiesel, Revenue Analytics

0aaJared Wiesel Revenue AnalyticsRetail can have a promising future. But the strategies to get there have been decidedly weak. This has led to a lot of finger pointing in the industry as to who or what is to blame, but until companies can comprehensively address the real issues facing their businesses, the headlines are going to remain the same.

Because the pricing lever is so easy to pull and generates quick results for investors, retailers are often tempted to make quick, gut decisions to generate foot traffic with low prices. But this addiction is unsustainable and not an isolated incident. Major companies are buckling down for bigger investments on price in the absence of other avenues to compete.

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For example, Walmart and Amazon. These two omnichannel retail giants are in an all-out price war, and while that battle seems great for shoppers seeking low prices on the items they buy most often, their retail competition and the consumer packaged goods (CPG) companies that serve them are feeling the heat.

To protect their margins during this price war, Amazon and Walmart are putting pressure on CPG companies to help fund the investment in lowering prices. For retailers that don’t have this type of clout, they are faced with the dilemma of finding other ways to fund a price war or risk being left behind. This battle, fighting for share in an increasingly crowded and transparent market, will continue to send shock waves through the retail ecosystem.

Amazon is also pressuring manufacturers by ditching the brands and goods that don’t turn a profit — known inside the company as CRaP (Can’t Realize a Profit) products. Separate from the pressure of these retailers’ pricing algorithms is the challenge posed by shipping costs. Profitable low-price items in brick-and-mortar stores can quickly become unprofitable when sold online after factoring in the cost of shipping.

In this price war, there is no one-size-fits-all solution. But, for those preparing for battle, here are a few key considerations for surviving the next retail addiction and death spiral:

Play to win. But only after you know where, when and how much to compete. Most retailers can’t afford to blindly follow the lowest market pricing (and they shouldn’t). The good news is that you don’t have to meet or beat all prices on all products to win. The key is identifying which products are most critical to customer price perception and then understanding the results a price reduction will yield.

Sounds great, but how? The first step is measuring customer response as your price changes relative to your competition. The outputs of these price sensitivity values will help to eliminate the unknowns, answering the questions of where, when and how much to compete to achieve your strategic objectives. As the retail environment becomes more volatile, it will be essential for companies to establish a regular and frequent cadence to reassess their pricing, ensuring their strategies are performing as planned and driving overall growth.

Act with speed. But also with consistency and confidence. Given the scale of most retail operations, robust technology capabilities are vital to successfully compete on price. In today’s hyper-competitive, transparent and dynamic retail environment there is no doubt that speed counts. That said, well-informed, consistent and confident decisions trump fast decisions any day. Without the right strategy and analytics to guide these decisions, you risk investing in price decreases that yield far less return than expected, or worse, are dilutive to the business.  

Having already tackled the science behind decision-making, how do you provide the right information to the user at the right time and in the right format, so they can make faster, more confident and more consistent decisions? It’s a combination of translating statistical model results into something they can understand, bringing to bear additional data that can help inform a confident decision, and structuring it all in a way that is easy to digest and fits business processes. Most importantly, it’s critical that they understand the specific action that they need to take as a result.

Pull the price lever. But don’t use it as a crutch. The power of pricing to drive volume and profits is unparalleled. Used correctly, it can be highly accretive. Abused, it can lead to quick ruin. Today’s customer demands competitive prices, but also craves experience, brand connection and convenience (among other things). Price should be a key part of your competitive strategy; however, it shouldn’t be your entire competitive strategy. If parts of your overall growth strategy aren’t resonating with consumers, you’re always going to go back to price. And the more you do that, the harder it becomes to break that cycle or addiction.

Today’s environment is taxing many retailers, calling for drastic shifts in strategy to survive. Still, there is hope. If you take the above strategy into consideration, there’s a way to still compete and win. We know of one retailer who has done this, and successfully fought the battle against aggressive online competitors.

For this retailer, it wasn’t financially feasible to blindly follow the pricing of its competitors. However, they couldn’t afford not to compete. Instead of just matching prices, they decided to take a data-driven approach by measuring customer response to price changes. As a result, they found many places where they could actually achieve a premium. In places they needed to invest and compete, they became much more targeted and strategic about where, when and how much.

So, for their entire portfolio, they could place their bets to maximize their odds of winning while still being in a good spot financially. The result — online sales grew five times greater year-over-year.

At the end of the day, it’s about trying to maximize the return for every dollar you invest in price. Armed with those insights, merchants can make more consistent, confident day-to-day decisions that help strike the balance between profit and volume to hit their overall objectives while competing.

Price wars are becoming the next retail addiction and will cause a “death spiral” as retailers race to the bottom on price. In this scenario, only the financially fittest will survive.  In the short term, consumers should benefit from lower prices on the shelf, but long term everybody loses if focus continues to coalesce around competing on price and away from areas like customer experience and innovation. Not only is this behavior inherently self-destructive, it begins closing off future avenues to growth. Once you’ve won a customer’s share of wallet based solely on the price of the good, what’s next? They are likely to stay only so long as you continue to be the lowest priced option.

By following the above considerations and applying a science-driven, predictive analytics approach to everyday pricing decisions, retailers can compete and win in a price war without damaging long-term prospects for growth. With the right approach, they can eliminate the unknowns of this challenging environment and win — increasing revenue without increasing risk.


 

Jared Wiesel is a partner at Revenue Analytics. In this role, he serves as the practice area lead for consumer goods and retail. Wiesel has led and executed project work across four continents with experience in multiple industries including retail, consumer goods, automotive, manufacturing, amusement and entertainment, freight and specialty services. He has a decade of experience partnering with Fortune 500 companies to help solve their most complex Pricing and RevenueManagement challenges. Wiesel’s primary areas of focus include pricing strategy, price optimization, rules-based pricing, process design and change management.

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