Why it matters:
- Many consumers are facing financial pressures this year, while others have savings and pent-up demand.
- Inefficient pricing strategies can leave potential profits on the table if prices are cut too low, or can alienate consumers seeking value if prices are set too high.
- Brands are tapping strategies such as demand-based pricing, while leveraging price optimization technology to mitigate the impact of inflation and supply chain hiccups.
Brands and retailers large and small face unprecedented challenges when it comes to pricing amid surging inflation, massive supply chain delays and a tight labor market.
They’ve been forced to make some unusual short-term pricing decisions, such as foregoing discounting typically used to drive sales on some products, said Ellen Kan, partner in the New York office of consulting firm Simon-Kucher & Partners, which has worked on pricing with a diverse range of clients, from Porsche to Eventbrite. Overall, she expects companies to continue to migrate toward more segmented and personalized pricing strategies based on data analytics, however, to drive business.
“It’s hard to do right, because you need more capabilities and systems, but I think that’s where a lot of folks are headed in the future,” she said.
In the meantime, here are some other approaches to pricing that retailers and brands have been deploying:
Leveraging demand-based pricing
Demand-based pricing is another strategy that Simon-Kucher advocates under certain conditions, according to Rosalind Hunter, a partner in the London office. Airlines rely on this strategy, for example, when they increase prices as demand rises for the limited number of seats available on each flight.
Demand pricing takes into account varying levels of consumer demand based on various factors, such as proximity to times when demand is expected to increase. In a recent blog post, Hunter cited the fact that Amazon’s pricing of pumpkin spice, which has historically averaged around $4, jumps to a range of $4.49 to $8.49 around Thanksgiving and Christmas due to increased demand.
Other situations that could call for demand-based pricing include incentivizing demand for perishable inventory by lowering prices as products approach their expiration dates, for example, she said.
[Read: How 3 Brands Tapped Tech to Slay Order Management and Reduce Labor Costs in a Post-COVID World]
It’s important to consider not only what the impact of price changes will be on demand, but also on other variables, such as the labor costs that may be involved in making a price change, and the impact that price changes will have on other products, Pavich explained.
Deploying ‘relative price positioning’ to stay in sync with value-seeking consumers
Increasing pricing is a necessity in the currently inflationary environment, but exactly when that should be done and how much prices should go up are variables that brands and retailers can measure and control.
Some retailers that see the need to be more aggressive on price are carefully passing along cost increases at a lesser rate than competitors, said Stephen Caine, partner in the Chicago office of Bain & Co., which has worked with companies in multiple industries on their pricing strategies.
“They are trying to hold the line, and not decreasing prices, but also not increasing prices as much as their competitors might be, which has the effect of lowering their relative price positioning in the market,” he said.
This strategy might not be viable for the long term and across all products, but it can help retailers maintain a connection with consumers seeking value, Caine said.
“It can be difficult to see an immediate ROI, but if you don’t make these kinds of moves, you risk getting further and further out of line, and your value proposition will struggle,” he said.
[Read: How the Pandemic Helped Brands Like Moët Hennessy Uncork New Revenue Streams]
Tapping price optimization tech to measure the impact of price changes
Leveraging technology that helps retailers make pricing decisions across multiple products so that price cuts can be balanced with price increases, region by region and store by store, may be the most effective way to control margins during an inflationary period, according to Matthew Pavich, senior director of innovation at Revionics, an Aptos company, whose customers have included a diverse range of brands and retailers, including Sally Beauty Holdings and grocery retailer Brookshire Brothers.
It’s important to consider not only what the impact of price changes will be on demand, but also on other variables, such as the labor costs that may be involved in making a price change, and the impact that price changes will have on other products, Pavich explained.
“It has to be strategic, and it has to be analytics-informed,” he said. “And you have to be listening to your customer.”
He also pointed out that pricing can be an important tool at a time of supply chain shortages because it can help drive demand for alternative product choices, for example, so that customers don’t deplete the inventory of items that are in short supply.
Aggressive pricing might be necessary to attract consumers who may be under financial pressure, said Pavich.
“It's important to not just [pass on] massive price increases,” he said. “It's important to have that balance.”
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