For many innovative, forward-looking brands, the pandemic was a catalyst for change. Now, these smart-to-market brands are taking this time of fluctuating costs and economic uncertainty to evaluate their pricing strategies. With margins being squeezed from rising inflation and inventory challenges, brands need to better align pricing with the current market conditions and consumer demand. Brands must recalibrate for today’s realities, factoring increased costs into the equation and eyeing price points that reflect the brand’s value, while considering what their target consumers can afford and are willing to pay. Striking this balance is delicate, to say the least.
Although pricing is an undeniably important component of merchandising, it hasn’t always been approached with the most comprehensive datasets or pricing methodologies. Today, most pricing decisions are based on intuition, competitive benchmarking and/or past sales. While these are all valuable inputs, they lack the foresight and first-party nature of direct consumer validation. Fortunately, with advancements in technology and data science, there is a better way.
The Four Pricing Pillars Brands Must Consider
While every brand is unique, questions around pricing often fall into one of four buckets:
- Pricing Strategy and Architecture.
When done correctly and with statistically significant datasets, brands can redesign their pricing strategy and architecture with smart Good, Better, Best tiering as well as intentional channel and market strategies — setting prices based on the unique consumers in each market and that shop specific channels. This drives long-term customer value and allows for discounting that moves inventory quickly but doesn’t leave money on the table.
Discounts within a pricing architecture are frequently deployed when a brand wants to move inventory quickly, which is often the case when faced with bursting warehouses, increasing storage fees and a looming recession. However, brands should resist the urge to enact markdowns done in sweeping waves of arbitrary rates with the hope of selling as much as they can before moving to the next tier. Millions of dollars of sales and profit are lost by this lack of precision, and overly aggressive discounting can also lead to extremely harmful long-term consequences for brands. Customers will rarely pay full price for any merchandise because they’ve become conditioned to wait for discounts. Brands need to understand how to pair price and quantity, and ultimately avoid discounting to keep brand equity high.
- Optimal Price Point for New and Existing Products.
It is no longer enough to create pricing bands by category and expect merchants to know where a given item fits along that scale. The difference of just a few dollars can cause demand to rise and fall significantly, particularly during an economic downturn. Merchants need data-informed pricing that maximizes margins and profits for each individual SKU. This requires insight into a consumer’s true willingness to pay and a clear understanding of pricing elasticity, which illustrates how demand changes when price changes.
Many brands tap well-known consulting or consumer research firms to host focus groups to determine the optimal price points, but these reports don’t come cheap; they can take several weeks — if not months — to develop; and the analyses aren’t always packaged in a way that is easy for merchants to interpret and put into action quickly.
Brands, and merchants specifically, should also be wary of bias if a consumer is ever asked directly about their willingness to pay for a specific item, which is a common tactic in pricing research. Direct questions about prices often lead to responses that are, in fact, lower than what the consumer would pay in reality. Brands also need to be careful not to over-rotate and inadvertently jeopardize brand integrity with lower price points that may degrade the brand’s perceived value, making it difficult to raise prices when the economy begins to swing upward again without upsetting or losing customers.
- Value-Based Attributes.
Often referred to as value-based pricing, value-based attributes help product and merchant teams determine which attributes consumers value most, which can directly impact the product and its price. Design details like graphics, logo placement, materials and other accents can have a significant impact on the cost of an item and its appeal to consumers. Product creators don’t want to add cost to a particular item for attributes and details that their target consumers do not value and will not pay a premium for, which, in turn, negatively impacts sales.
For example, product creators may think that consumers want genuine leather, which comes at a premium, but testing may show that their target consumers would be equally or more satisfied with a vegan leather product at a lower price point. Value-based attribute testing helps product creators understand what a consumer truly wants and what they will pay for the details they value most, which helps guide both the finalization of products and pricing.
- Actionable Market and Competitive Considerations.
The need to understand consumers’ pricing awareness and purchasing considerations, especially compared to competitors, is highly relevant today as nearly all eyes around the world are fixated on increasing prices. While protecting margins is mission-critical right now, brands also know that this is not the time to risk alienating their target consumers, especially with so many alternatives from around the globe readily available at consumers’ fingertips. Brands must develop a pricing blueprint that can insulate margins from macroeconomic forces as well as identify pricing white space and market share growth opportunities.
Pricing is a Science — Not an Art
Advanced analytics now offer the very real ability to approach pricing more as a science than an art, as it has been for far too long. Optimized pricing that balances consumer demand and a brand’s need to protect margins simply cannot be achieved without a more sophisticated understanding of consumer price sensitivity across products and time. It requires carefully crafted consumer surveys, a statistically significant volume of data, and advanced analytics to achieve. Armed with the right consumer data, brands can be more precise and intentional about their pricing strategy and architecture, including a discounting strategy that indicates when and how much to mark an item down.
As brands reconsider their pricing strategies, they must also keep bigger brand objectives in mind. Economic contractions are cyclical and generally only last 12-18 months. In fact, a recent survey found that 81% of CEOs are anticipating and preparing for a shallow recession. Furthermore, Corporate America is not experiencing typical behavior and conditions that have preceded recent economic downturns. For example, 75% of CEOs stated that demand has risen or held steady over the last three months, which is not what economists expect to see heading into a recession.
Any new pricing strategy and architecture should be viewed through the short- and long-term lens, determining what needs to be done to address immediate needs — i.e. moving through a backlog of inventory before the holidays — and what is truly best for the brand.
Matt Field is the Co-founder and President of San Francisco-based MakerSights, a leading consumer insights and product testing platform for apparel, footwear, and accessories brands. MakerSights’ mission is to radically reduce waste in the retail industry by helping brands leverage consumer data to make products that people love. Field leads operational execution, people and customer partnerships at MakerSights. Prior to MakerSights, he was a key executive overseeing international business, strategy and analytics at BirchBox. Field started his career as a consultant at Bain & Co., advising Fortune 500 clients in the retail, consumer and technology spaces. Field graduated summa cum laude from Princeton University.