Mastering the Art and Science of Pricing, Part 1
It’s not a unique experience today for retailers to be facing market upheaval. Across the globe, shoppers are more in control than ever before, shopping 24/7 across all channels. Meanwhile the competitive environment is at its fiercest as international giants, specialty on-line retailers, and aggressive startups all take on local retailers head-on. And here in Australia, retail inflation has remained so far below the Consumer Price Index (CPI) for so long that the Reserve Bank of Australia conducted a special analysis and investigation, issuing a report this June that cited relatively soft commodity prices offsetting exchange rate depreciation in COGS and – you guessed it – increasing retail competition, including pressure from international retailers aggressively seeking market share.i
Given what some publications are calling “the Aldi effect,” Australian retailers are at a high risk of getting caught in a race to the bottom as they drown in price cuts in an attempt to hold on to precious market share. But we know that blindly responding to every competitive price change can end disastrously with unsustainably low margins and the demise of a profitable business model. How can a smart retailer stay afloat?
Fortunately there’s a proven alternative: data-driven analytics that let retailers provide very targeted pricing that responds to customer and competitive environments while preserving margins and the bottom line. In our 14 years of helping successful retailers worldwide do just that, we’ve documented adoption along what we call the Responsive Merchandising Maturity Model – with distinct Crawl, Walk and Run phases.
I’ll touch on the Crawl phase here, and I highly recommend you take a look at my colleague Sue Dale’s more in-depth treatment of the topic. At the crawl phase it’s critical to lay a solid foundation that both delivers near-term results and positions you to better connect with customers, outperform the competition and succeed even in volatile times.
1. Commit to data integrity.
The good news is that retailers today have unprecedented ability to collect meaningful and real-time competitive and customer data, and (as we’ll see in the Walk and Run phases) perform analytics that unlock clear and actionable insights. The foundational element is to ensure you clean up dirty data and implement processes to ensure good data integrity going forward. Again, Sue’s blog gives you good insights on doing this effectively.
2. Sharpen your price strategy.
Moving from a reactive to a proactive philosophy means revisiting – and refocusing – your price strategy. Do you want to maximise profits or grow market share? Are you an Everyday Low Price provider or do you have a more targeted high-low strategy? What is your price image – and what should it be? The answers to these questions in turn drive your key value item (KVI) strategy and a price zone strategy.
3. Implement automated, comprehensive competitive insights.
With competition hitting retailers from all channels and from nontraditional as well as entrenched competitors, old-style physical price-monitoring is woefully inadequate. Instead, retailers focused on responsive pricing turn to a targeted, scalable, integrated and automated shop process. The right solution will provide insights into which products are important to your customers – and which are not.
To learn more, I suggest you take a look at our new Price Management video.
Meanwhile we’d love to work with you to take the lessons we’ve learned guiding scores of retailers along their successful Merchandise Optimisation journeys and apply them to your specific business environment, factoring in current market conditions in Australia and New Zealand. I invite you to contact me directly to start the conversation.
iAlexander Ballantyne and Sean Langcake, “Why Has Retail Inflation Been So Low?” Reserve Bank of Australia Bulletin, June 2016, http://www.rba.gov.au/publications/bulletin/2016/jun/pdf/bu-0616-2.pdf
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