Pricing in retail has always been a crucial part of any sales strategy. It has also become ever-more pertinent amidst a backdrop of high street closures, which could see brands attempting to remain competitive by simply offering the lowest prices – a damaging false economy.
Retail pricing has come into particularly sharp focus following John Lewis’s recent announcement of a shocking 99% profit slump, which the brand has largely blamed on its ambitious “never knowingly undersold” pricing strategy.
But how can businesses price competitively, outside of simply offering the lowest prices? The solution is simple; businesses must price more intelligently and look beyond obvious – and damaging – quick-fixes.
But how do we go about this?
Price by elasticity
In an ideal world, simply offering the lowest price would be enough to make a product stand out and drive demand. However, demand for individual products will be differently affected by changes in price – a concept known as “price elasticity of demand”.
Therefore, offering the lowest prices on everything isn’t the way forward; indeed, such a strategy can create a false economy wherein retailers lose money on selling “inelastic” products at far below market value and thus see vastly diminished returns.
Retailers can avoid this by deploying an elastic “high runner” pricing strategy. This involves discounting more aggressively on more elastic products – thus increasing demand and footfall while diminishing margins – and then making up these margins by cross-selling and charging higher prices for complementary goods, which tend to be less elastic.
For example, a TV is highly elastic, while demand for the wall mount it often sells with is far less affected by price. Therefore, it makes business sense to price more aggressively on the TV – as that will lead to a demand spike – while taking more margin on the wall mount which sells with it.
Automation is key
Just a decade ago, many retail brands would have only needed to concentrate on optimising their bricks-and-mortar offering, their ecommerce site or some combination of the two.
However, the rise of the smartphone, as well as more recent innovations such as shopping by voice and directly through social media, has given brands many more channels to consider. This has created a far more volatile retail landscape and, as evidenced by the high street closures throughout this year, a failure to keep up can prove damning.
Indeed, while the average retailer previously had to consider around 4,000 price and marketing combinations per quarter to stay ahead of competitors, this number has now risen to 60,000,000 combinations a day.
AI – particularly machine learning – can greatly streamline the pricing process by collating and analysing vast pools of data, thus allowing retailers to price dynamically based on economic factors such as price elasticity of demand. Not only does this offer previously-unparalleled levels of personalisation, but it crucially also offers retailers a way to efficiently compete on price without partaking in a damaging “race to the bottom”.
Introduce price into the marketing mix
As ongoing high-street closures have driven a greater emphasis on e-retail, online visibility – driven through online marketing channels such as Google Shopping – has become far more integral to standing out in a saturated marketplace.
However, the increasing digitalisation of retail has also changed the classic “marketing mix” in a surprising way. As more retail services move online, pricing has become more important to marketing than place, people and even product.
Price is the single most crucial factor to take into account in online marketing, due to pricing data essentially deciding both the marketing budget and the overall efficiency of ongoing marketing activity. As a retailer’s pricing strategy decides the margin left on a product – which in turn decides what is left for marketing budgets – the importance of leveraging the relationship between pricing strategy and marketing spend becomes clear.
Automation can make pricing by marketing strategy as accessible as it is effective, allowing businesses to easily balance marketing budgets with projected marketing effectiveness to determine the price point that allows for a suitable marketing spend per product.
It’s time to put more thought into pricing
If a “never knowingly undersold” pricing mantra is continually allowed to proliferate, John Lewis is likely to be only one example of a long line of retailers – large and small – that see the adverse effects of this short-sighted strategy.
It’s time for retailers to realise that pricing competitively no longer means offering the lowest prices, but rather by what is going to bring the most good long-term. This could be through pricing dynamically according to elasticity, employing innovative “high-runner pricing”, using price to influence marketing strategy (and vice-versa) or, ideally, by embracing AI and automation to offer a combination of the above.
With Black Friday, Singles Day and Christmas now just around the corner, the question for businesses is whether to take the simple – and damaging – strategy of getting sucked into the annual discounting frenzy, or whether to take a more considered, yet agile, approach.
How businesses choose to answer this question could very well determine whether they are in next year’s headlines as a forward-thinking success story, or merely the latest in a long line of high-street casualties.
Sander Roose is CEO of Omnia Retail, an SaaS solution for integrated pricing and online marketing automation
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