Any hopes of a return to normal for the retail industry in 2022 have quickly been derailed for retailers and consumers alike, as a result of numerous challenges that have continued to disrupt the industry in the new year. From supply chain disruptions to product scarcity — and the unfortunate situation continuing to unfold in Ukraine — there has been no shortage of issues that retailers have had to cope with thus far in 2022. However, arguably the most pressing is the ongoing inflation crisis that we are facing.
With margins already stretched incredibly thin and many consumers still feeling the effects of the COVID-19 pandemic, retailers are struggling to find a way to navigate the current pricing landscape in a way that both accounts for the rising cost of business and also keeps prices feasible for consumers. This is why retailers have begun to lean more heavily into their technology capabilities as a way to gain dynamic control over their pricing operations.
However, because many retailers are still getting their feet under the table after expanding their digital capabilities in the wake of the COVID-19 pandemic, many are finding it hard to really make the most of their technology tools and business intelligence — particularly AI and machine learning.
Because of the relative newness of AI in retail and the associated unfamiliarity and deliberate approach to rolling it out, many retailers have yet to fully see the benefits of AI for dynamic pricing. Moreover, because of the disruptions that have occurred over the last 24 months, some retailers are actually pausing their digital transformation efforts in favor of sticking with what they know in an effort to eliminate even more disruption. This is a strategic miscalculation during an inflation crisis when time is of the essence and the market is becoming more complex, not less. Thus, the ability to forecast and anticipate is of paramount importance.
Advertisement
This is exactly where AI can help retailers. AI unlocks the ability for retailers to get a predictive sense of how the market may unfold and to be more proactive about how they could handle eventual cost increases. In addition, it will help them execute price increases across the matrix of items and stores in a way that balances customer response, revenue and profit.
With that in mind, here are a few ways that retailers can better leverage AI to help them achieve their pricing goals.
Create a Single Source of Truth
Despite the boom in data-driven operations over the last decade, many retailers still do not have a consolidated source of data that serves as a foundation for all of their other business intelligence decisions. Retailers sit on top of an enormous pool of data that includes internal POS/costs, vendor pricing, competitive benchmarking insights, inventory and much, much more. And all of this needs to be continuously overlaid and synthesized in an automated fashion in order for retailers to figure out exactly what are the biggest drivers of sales and profit — which is virtually impossible to do correctly if data isn’t compiled into a centralized hub. Therefore, before diving into AI, retailers need to prioritize getting data fundamentals in place first and foremost.
Identify Price Sensitivity and Risk
Customers and store locations are not monolithic; therefore, each has its own set of nuances and risks that need to be focused on. This is amplified significantly during times of financial crisis. Thus, retailers need to take the time to get a granular view of which stores and consumer bases are most at risk and build pricing strategies that reflect these insights.
This is of course easier said than done. However, with the proper data foundations in place, retailers can then use AI to not only conduct this risk analysis more quickly but dynamically adjust pricing based on evolutions in the marketplace. Moreover, retailers can use these insights to balance pricing across their entire inventory and store locations as needed — holding prices in the most at-risk areas while tweaking it in others — to ensure that they are able to deliver both the ideal value to customers while also hitting a sustainable margin.
Upstream Oversight
The next tent pole item retailers should look to tackle with AI is upstream oversight. The last 24 months have been full of one upstream disruption after another. And while any sort of disruption is never ideal, when these issues begin to overlap, it can lead to prolonged periods of inflation.
Unfortunately, because a majority of retailers have been stuck reacting to disruptions due to a lack of forecasting ability, many have had to scramble to fill holes ad hoc, with no long-term strategy built whatsoever. This simply has to change, especially as inflation looks like it will be a mainstay throughout 2022 — if not longer. With AI, retailers can begin to use the data they have at their fingertips and merge it with external data to help them get a dynamic view of market conditions that will allow them to make short-, medium- and long-term strategy decisions. This will not only help them tackle product pricing issues directly, but will also help mitigate indirect inflation contributors — such as sourcing and freight costs — as well.
This period of inflation may be one of the most challenging that retailers have ever had to navigate. However, by implementing AI tools properly, retailers can find a way to not just address the inflationary issues of today, but help them build a more adaptable and agile infrastructure that can help them deal with future periods of uncertainty and rising costs as well.
Philip Melson is Client Partner at Fractal Analytics, leading Fractal’s Global Retail consulting practice. He is passionate about retail given its rapid and unprecedented evolution. Over his 20-plus year career, he’s partnered with or worked for a number of Fortune 500 retailers across six continents. In those roles, he’s helped unlock a deeper understanding of the strategic opportunities and challenges in their businesses, collaborating with them to develop the analytic frameworks, activation plans and supporting narratives to spur growth, change and innovation. Melson’s professional interest lies in helping retail leaders successfully and seamlessly integrate AI/ML into their businesses and maximize the impact using his unique blend of analytics, consulting and retail experience.
