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Price Management in Retail and the Success Factors of the New Decade

Pricing has always been and continues to be a core capability for retailers. Get pricing right and retail companies gain a competitive advantage. Get pricing wrong and retailers lose opportunities to take their company to the next level of growth and profitability.
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Another year in the books, another year in the past. It’s time for 12 new chapters and 365 new chances. If you’re a retailer, you’ve probably experienced some losses throughout the retail apocalypse of 2019. Chances are you’ve learned your fair share of lessons (hopefully).

Well, now it’s up to you to put those lessons into practice. We’ll show you how you can make 2020 a great year for your retail business and turn the start of the new decade into a victory.

But what can you do to make your retail business more profitable? This question has kept many a retail CEO up at night. Luckily, there are a lot of opportunities for innovation in modern business that can help smart companies stay competitive in the quickly changing retail industry. One key area that companies can innovate in to achieve higher profits is pricing optimization.

Pricing has always been and continues to be a core capability for retailers. Get pricing right and retail companies gain a competitive advantage. Get pricing wrong and retailers lose opportunities to take their company to the next level of growth and profitability. But traditional pricing methods aren’t any good for this new world of retail anymore. With the increasing pressure of changing market conditions and online retailers turning more and more into tech companies , traditional retailers must embrace innovation to improve their pricing strategy. Pricing has professionalized from a simple mathematical task to a complex process that humans can’t handle on their own anymore, at least not efficiently nor effectively.

Once upon a time is outdated – and so is Excel

Trying to guess prices for thousands of SKUs seems like an entertaining TV show (which it is) – but this also means it is a risky diversion which doesn’t always lead to victory. Retailers can’t afford to take that risk anymore while the brick-and-mortar graveyard continues to grow – the risk of defeat is higher than the chance of winning. But this is what the pricing process still looks like for most brick-and-mortar retailers.

But why do retailers need to adapt their pricing strategy?

Well, first of all – now more than ever, external factors are making it more challenging for retailers to determine the best prices for their products:

• Rapidly changing and unpredictable market
• Constantly evolving consumer preferences and behaviors
• Increasing complexity and amount of external data that needs to be collected and analyzed

Retailers need to not only craft optimal prices for each individual product – across sales channels, countries and locations – but also incorporate many factors into its pricing process, including inventory, seasonality, purchase prices, product life cycle, current trends, competition and demand. Humans can’t consider all factors at once, and retailers often don’t have the necessary information. Moreover, human decisions are “imperfect” and often lead to mistakes. Also, employing a non-agile and one-size-fits-all approach to pricing is as ineffective as it can get.

I hate to break it to you – but relying on “gut feeling approaches” to setting prices or using outdated and difficult to scale technologies such as spreadsheets, will leave your retail business and your revenue in the dust.

Here are the success factors to thrive in the new world of retail:

Customers Price Acceptance

Today’s price formation needs to be consumer oriented. Yes, production costs and monitoring of competitor prices are still relevant, but the focus is on satisfying the need of the customer. If you align your price with customer expectations then, and only then, the price is really right. Responding to your customer’s willingness to pay doesn’t necessarily mean a low price. Often it can mean that it’s still acceptable for the customer to pay a higher price than originally set for various reasons, one being changing demand – e.g. if summer arrives earlier than expected, fashion retailers will see a significant impact on sales. You also need to take into account that price acceptance varies depending on region and sales channels. For instance, consumers in London have a higher price acceptance than consumers in Brighton, as the cost of living is generally higher. Incorporating this into your pricing strategy can increase your profit significantly.

Personalized Pricing

The customer is King – and he’s well aware of it. Today’s consumer shares more information than ever before, and expects personalization in return. The research and advisory company Gartner emphasizes the need to understand customer behaviors to enable personalization across all touchpoints. To succeed in such a competitive environment, retailers must base pricing decisions on characteristics and actions. This will subsequently lead to an increase in loyalty due to individual perceived customer benefits and elevate your sales performance.

Real-Time Pricing

Market conditions are constantly changing, and retailers must react in real-time to gain a competitive edge in the jam-packed retail market. In the decade of ever-evolving trends this is not a nice-to-have feature anymore, but a must-have! Especially in the fashion industry, trends are constantly shifting and so does the consumer’s purchase intention. Demand isn’t a constant – at times it fluctuates dramatically just like the weather. If you don’t react to demand changes, customers will leave your products on the shelf instead of putting them into a shopping bag, leaving you with excess inventory. Instead, you should make sure your supply meets demand by continuously adjusting your pricing – in real-time.

Effective Discount and Promotion Planning

One particular mistake many retailers continue to make is the ineffective markdown of prices. Starting a sale too early or marking down prices more than necessary to increase demand, prevents you from exploiting your full profit potential. Ask yourself the following questions: When is the best time to launch a sale? How much markdown is really necessary to sell off products by the end of their lifecycle? Well, you probably already ask these questions – but nowadays the answer should not be based on the usual “gut-feeling approach”, but on data that guarantees effectiveness and higher profits. If the price is too low, you give money away. If the price is too high, the product will remain on the shelf.

Price Setting Analysis

To find out if the pricing for individual SKUs has been successful, and to determine potential opportunities for optimization, continuous monitoring is critical. You can’t do it better if you don’t know how to learn from your mistakes. Instead of randomly trying out things and wasting potential you need a new best friend – data. Data insights and not intuition will determine your future.

How can retailers implement these factors successfully in their pricing strategy?

Bad news first: you can’t implement these factors solely with human capabilities and Excel, at least not in an effective and efficient way. Here’s the good news: Artificial Intelligence (AI) and Machine Learning (ML) can save the day for retailers.

In the wake of constant industry disruption, AI empowers retailers to harness the power of data to set prices that will compel customers to buy, and to keep up with online retail giants that are gaining strong ground in local markets.

Big data can open new potentials for prize optimization. However, brick-and-mortar retailers in particular still struggle to obtain sufficient data and lack the resources to analyze it properly. While Amazon and other rising online stars have been leveraging the power of AI for a while now, traditional retailers often remain skeptical of intelligent machines.

Machine Learning and Artificial Intelligence Make Better Pricing Decisions

Try to see artificial intelligence more as a concept of amplified intelligence which accelerates and refines human knowledge at a more scalable level. Retailers actually teach the algorithms. It is their knowledge that allows algorithms to optimize decisions. The more information algorithms chow down and the more information they have to learn from, the stronger and more accurate they become. Another benefit AI provides is the automation of routine tasks.

Though many traditional retailers may see the transformation as a wretched fellow, it is a true opportunity. Retailers who adopt this advanced technology will be at the top of changing trends and see significant increases in sales and profits. Retailers who don’t, will be left behind. There are no more excuses – today machine learning is available for everyone.

The Evolution in Practice

It’s up to you – you can set up your own team of tech-experts and develop a ML tool for price optimization – just like brick-and-mortar retailer H&M – a resource-consuming process that won’t be accomplished overnight, or you can benefit from tools that have brought success to other retailers and are immediately ready for implementation. The possibilities are there.

One thing is clear, to exploit your full profit potential you should make sure that you’re covered from product launch throughout the entire life cycle. We provide a cloud-based platform where you can choose between different SaaS solutions to optimize your pricing. No matter whether you want to market new products and determine the optimal initial price, plan your promotions intelligently, optimize your markdown pricing or adapt to market changes in real-time with dynamic pricing.

All it takes to kick-start a successful future is the data that you already have in your ERP system. The aifora Retail Automation Platform then supplements it with external factors like holidays, events and the weather and aligns the algorithms with your strategies and business rules to make optimized pricing decisions for you. Sounds great doesn’t it? All you have to do is say yes to the dress (well rather its price). Of course, you do not have to accept all price changes. Users can choose to override the machine’s decisions and see what impact this will have on sales and profits.

Digital transformation waits for no business. So what are you waiting for?

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Patrick Brüns - Head of Marketing

Patrick Brüns
Head of Marketing

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