Under any circumstances, the holiday season is a do-or-die time for retailers across virtually every segment. In 2021, the stakes are even higher — as the Delta variant sent shoppers into retrench mode yet again, retail and food services sales fell an estimated 1.1% in July, according to the U.S. Census Bureau,[i] ratcheting up pressure to deliver a strong retail holiday season.
Of course, there’s also reason for optimism. Despite the havoc wreaked in 2020 by the pandemic, NRF reported that November-December 2020 retail sales were an unexpectedly high 8.3% above the same period in 2019, while online and other non-store sales alone grew 23.9%.[ii] And as the economic recovery has gained steam, Quantum Metric projects that almost half of shoppers (47%) expect to spend more on the 2021 season than the prior year.[iii]
Amid the mixed picture, there’s another key driver of uncertainty — inflation. Both retailers and shoppers fear that the pinch of inflation they’ve experienced in recent months will grow more painful as supply chain costs continue to rise. Retailers must be very careful not to focus only on top-line growth and risk losing sight of the importance of healthy margins and a robust bottom line.
AI-Based Pricing Brings Surgical Focus to Help Retailers Successfully Navigate Unprecedented Markets
Increasingly, innovative retailers worldwide are embracing advanced price and promotion intelligence in order to craft prices and offers that reflect real-time demand signals, competitor activities and shopper price sensitivities. With the unprecedent pace of change in shopper, competitor and market behaviors, merely dusting off strategies from years past leaves retailers painfully exposed as they position against more agile, data-driven competitors.
Meanwhile, the pandemic-driven shift to online channels means shoppers have more price transparency than ever, and the ease of switching in the moment to a more aggressive competitor is as simple as a swipe or keystroke. Fortunately, artificial intelligence not only factors in demand signals in making price recommendations, but also keeps dynamic track of which items customers are paying most attention to prices on — the all-important Key Value Items that are so critical to a retailer’s price image.
The net result is the ability for retailers to leverage AI pricing to consistently deliver automated prices that pack a win-win wallop: channel-specific prices that engage shoppers on the items they care most about, while artfully recovering margins elsewhere in the mix to ensure sustainable healthy margins, even when rising supply costs come into play.
The Power of Capitalizing on Cross-Item Effects
Another area where AI-based data science can make a powerful contribution is in factoring for cross-item effects, including both affinity and cannibalization. Human hunches, especially if they are based on behaviors from past years, are not sufficient in a completely transformed retail landscape. But innovative retail price science can pinpoint exactly what price and promotion points will achieve a retailer’s overall goals — balancing unit sales, margins and profits in an elegant way designed to entice shoppers and drive to business objectives.
With these capabilities, retailers avoid the insidious trap of focusing on a single promotion that may meet target revenues and units, but unknowingly severely undermines sales of another item in the category, ultimately doing more harm than good to the overall business. This is particularly important with seasonal items that are big sellers during the holidays, meaning there is little margin for error if retailers don’t get it right straight out of the gate.
Conversely, retailers may be able to go more aggressive with pricing and promotions on certain items to draw more traffic or to position effectively against competitors on hot sellers. With insights into how sales of these items will drive affinity items that are much more margin-rich, retailers can take a well-informed approach that delights shoppers with engaging prices — and delights the executive suite with business impact.
A final consideration is yet another downside to getting prices or promotions wrong. With seasonal items in particular, missing the mark on pricing, even if only a little, often results in excess stock on hand that has very weak demand, necessitating markdowns. While markdown optimization data science can minimize the losses associated with markdowns, no retailer wants to incur markdowns that could easily have been avoided in the first place.
The Win-Win Imperative: There are No Do-Overs
Retailers have a front-row seat, for better or for worse, to a truly historic and unprecedented holiday season this year. Pundits can paint plausible scenarios for any number of trends, and no retailer has a crystal ball to know with any confidence how the season will actually unfold.
Fortunately, the limitations of human predictions are more than compensated for by the capabilities of today’s advanced AI pricing and promotion science. Retailers armed with proven science are well positioned to attract their preferred shoppers with surgically crafted pricing and promotions designed to drive traffic and basket, all while ensuring that bottom-line results perform to plan.
Todd P. Michaud is President and CEO of DemandTec. He drives DemandTec’s vision, strategy and execution in creating and delivering the market’s leading AI-based full-lifecycle pricing and trading partner collaboration solutions to innovative retailers and CPG brands worldwide. His passion for customer success and continuous innovation sets the tone for DemandTec organization-wide. A growth-oriented leader, Michaud has more than 30 years’ experience in the retail technology industry, including executive leadership roles at Hypersonix, Symphony RetailAI, NCR, Revionics and Retalix. Michaud launched his career with 16 formative years at IBM in a variety of sales, marketing and solution executive roles.
[i] “Advance Monthly Sales for Retail and Food Services, July 2021,” The U.S. Census Bureau, August 17, 2021.
[ii] “NRF says 2020 holiday sales grew 8.3 percent despite pandemic,” NRF press release, January 15, 2021.
[iii] “New Data from Quantum Metric Finds Majority of Americans More Emotionally Invested in 2021 Holiday Season, Boosting Expected Ecommerce Spending,” Quantum Metric press release, July 21, 2021.