Despite a positive job market and a stabilized economic environment, most consumers (96%) are looking to save money in the short term, according to a recent study from PwC. But at the same time merchants’ margins are being squeezed, making intelligent pricing and promotions strategies even more critical for success.
Lifecycle pricing, which integrates base pricing, promotions and markdowns into one holistic strategy, can help merchants optimize their approach — especially as they strive to localize, and even personalize, experiences for consumers across all channels. The end result isn’t just a better experience for shoppers (because you’re adapting pricing and promotions to their own unique perceptions of value); it also enables retailers to increase margins among consumers who may not be as price-sensitive as others.
“Localization is critical because there’s so much nuance across different regions,” said Matthew Pavich, Senior Director of Retail Innovation at Revionics in an interview with Retail TouchPoints. For example, the base price for organic produce will likely be very different in New York City than in Florida because overall cost of living is significantly different in these areas. Additionally, these markets have different culinary preferences and even lifestyles that can and should influence pricing.
“When you think holistically about pricing, the Holy Grail we’re all talking about is personalization,” Pavich explained. “But you can’t do personalization for everyday products. Now, it’s all about how you reach consumers through tailored promotions.”
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New advances in AI and data science enable retailers to tailor pricing and promotions to different consumer and loyalty segments across all of your stores with accuracy, speed and agility. And by taking an integrated approach to pricing, promotions and markdowns, retailers can use a holistic data-driven strategy that uses the same science and is measurable for all teams.
Without such an approach, “you aren’t able to really understand the global impact to your holistic business,” Pavich explained. “And if you’re using different scientific models for different things, that can be a real challenge, so [integrating pricing, promotions and markdowns] creates a standardized, proven scientific model at the core of all three, because there’s a lot of shared things between.”
Develop a Pricing Foundation
The foundation of any strategy is base pricing — the initial price of an item, typically based on rules such as margin goals, size of the item, brand type and even manufacturing parameters, e.g. if the product is organic, local or sustainable.
But Pavich noted that retailers shouldn’t price items based solely on these rules. With a robust AI solution, they can price items more granularly, based on location, market conditions and competitors’ strategies.
He added that everyday pricing requires more than simply matching a competitor or hitting the same margin: “It’s really about finding the proper balances to achieve marketshare and reach organizational goals.”
Pavich used salsa as an example: if a grocer adds a new brand of salsa to its assortment, it has to consider the base pricing of a product that’s similar to it based on size, price elasticity, quality, etc. “Let’s say you get a cost increase on an organic version of a different brand of salsa that’s larger,” Pavich explained. “Then you’d have to take into account the volume differences and the fact that one is organic, and one is not.”
Create Alignment with Marketing to Drive Promo Effectiveness
One of the challenges to creating a holistic, data-driven pricing and promotions policy is that a big disconnect remains between marketing and merchandising teams, especially their perception of their companies’ pricing strategies, according to research from Revionics.
Pricing and merchandising teams need to collaborate more closely with their colleagues in marketing, whose primary responsibility it is to acquire and retain customers and ultimately drive sales for the business. As the holiday season kicks into gear, it’ll be critical for these teams to align with brand partners to ensure activities meet mutual goals and don’t conflict with initiatives on other channels.
“If you talk to any retailer about their pricing and ask what percentage of their time is spent on promo versus everyday pricing versus markdown pricing, it doesn’t matter what their sales mix is, they will tell you 85% to 90% of their time is spent on promo, and that’s because of the number of sandboxes you’re playing in,” Pavich said. “You have marketing, creative and the brand vendors who are sometimes the ones initiating the promotions, so it’s a more complex process that is starting to get streamlined by technology.”
Promotion optimization solutions can help merchants ensure they’re not running inefficient promotions and can pinpoint offers for specific markets and consumers. Pavich explained that a significant percentage of retailers’ promotions are ineffective for one of several reasons:
- The retailer drove sales, but the promotion wasn’t truly profitable;
- The campaign drove a sales lift, but it cannibalized sales for another brand or product;
- The promotion performed well with a 10% discount, but would have performed better at a steeper discount; and
- The campaign funds would’ve been better used for a different product from the same brand vendor.
With AI and collaborative technology, “all of the guesswork is gone and there’s less running between vendors,” Pavich said. “You can have truly statistically informed discussions with your vendor when you’re determining a promotion on an item, so it’ll drive affinity without creating cannibalization. You still have to bring all those parties together, so you really need to have a collaborative work tool.”
This level of data and insight can drive collaboration while also creating true alignment around how pricing and promotions will impact bottom-line results, Pavich added. “There’s a whole lot of low hanging fruit in terms of efficiencies — not just operationally having fewer bad promotions, but then the ones you do have are more efficient.”
Use Analytics to Improve Product Markdown Processes
Once demand for product slows, retailers need to implement a markdown strategy. But how much can they mark an item’s price down without sacrificing margins, or worse, hurting brand perception?
Many times, markdowns are heavily weather related, especially for fashion retailers. Other times, they’re influenced by seasonal trends and dynamics. These are some of the biggest reasons why localization strategy is key. “If you start marking down your summer clothing in Minnesota at the same time that you’re doing it in Florida, you’re going to be in for a big bloodbath,” Pavich said. “It has to be informed by the consumer and AI — look at what the customers are saying in their data. That will help inform your decision to determine markdowns by market.”
An AI-powered demand tracking solution can help retailers gauge product popularity and performance, so they can determine the right time to mark it down. It also can help determine the minimum rate retailers should use for markdowns to reach their goals.
“Using the right algorithm, you can improve profitability by 5% to 10% if you understand how to mark down products in different markets, and even different stores, based on inventory levels,” said Pavich.
