Win the Pricing War

Retailers must understand the impact of pricing strategies beyond Every Day Low Price to stay competitive and increase profit margins both online and in-store. By Michael Falck

Retail today is one of the most dynamic industries with a constant flow of new ideas, new products and new ways to entice customers into the store. With the continued rise of online shopping, retailers must be even more creative to understand omnichannel dynamics and how to make the most of their brick-and-mortar stores.

The increasingly complex supply chain means that retailers today can no longer rely on traditional pricing strategies in order to differentiate their brand.

Indeed, today’s retail philosophy is increasingly underpinned by smart technology to help make sense of the myriad of data available and to inform strategies that drive both consumer loyalty and make a positive difference to the bottom line.

To date, price has been the one constant that has been a major weapon for retailers. It is used in many different ways – from Every Day Low Pricing (EDLP); promotional pricing and loss leaders, to the myriad of promotional mechanisms around price of two-for-one, buy one get one free and other variations. They all revolve around price, often supported by advertising, point of sale material and shelf-edge labels.

The Promise of EDLP

Over the past few decades, the impact discount retailers, especially grocers, has had on the U.S. retail industry is significant, challenging other retailers to stay afloat in the competitive market. However, even though these discount retailers market themselves as lower price outlets, the discount sector does not rely solely on EDLP. They too have aggressive price promotions and make it more exciting for customers, attracting repeat visits.

When it emerged, the concept of EDLP was very attractive to the retail supply chain because it meant stable, easily forecastable volumes of the full range products on offer, enabling retailers to enjoy the even flow of each item through the supply chain. Seasonality still came into play but with EDLP, there were no massive spikes in demand caused by promotions and price drops.

As a retail philosophy, it seems very attractive. That is, until someone breaks rank and starts to implement promotions to the point at which EDLP generally breaks down. Why is this? Fundamentally, Every Day Low Pricing loses excitement for shoppers and retailers, in general. It is much more fun for shoppers to pick their way through a retailer looking for bargains and accept that everyone buys things they do not need or want, but simply purchased because they could not resist the temptation of a “good deal.”

A New Pricing Strategy

Now, retail professionals need to accept that while there may be times of stability, retail is going to remain a rollercoaster, especially in today’s omnichannel environment.

Not only do retailers need to be able to predict, manage and react quickly to changes in demand, but they also need to react to dramatic changes on a line-by-line basis.

The ability to accurately forecast the demand of an item before, during, and after the promotional period can have a massive impact on the profitability and smooth operation of a retailer. If not, this can cost retailers to over stock a promoted item, damaging the profitability and operation, particularly in food where shelf life plays an even more important role.

Retailers need an accurate forecast on which to build, that allows for the capability to plan the display and flow of items through the supply chain into retail warehouses and all the way to the shop floor.

This requires the ability to utilize allocation, flow and volume planning of items through the supply chain along with store space planning in the knowledge that they will all come together to create the most successful outcome. If you cannot get this right, performance will always be suboptimal.

By understanding the impact of seasonal promotions and carrying out regression analysis to understand purchase patterns by store, geography and customer, retailers can increase both customer service and profit margins. Forecasting more accurately at the store level, through the supply chain from supplier to store, in a smooth and manageable manner will drive success to both customers and retailers.

If EDLP could meet customers’ and retailers’ expectations, life would be easy and retailers more efficient. However, retail is not like that.

Today, price is no longer the only weapon in the retailer’s arsenal. Today, retailers have to understand how customers will react to the combination of pricing, promotions, availability and seasonality – on a store-by-store basis. That is the key to retail efficacy, efficiency, and ultimately, success.

Michael Falck is the U.S. president for RELEX Solutions.