The Pricing Blog by Omnia Retail

Three levers to success in an inflation-hit industry Retail and branded goods pricing is currently at the centre of major socio-economic and technological trends. A period of global market volatilities and record-high...

Three levers to success in an inflation-hit industry Retail and branded goods pricing is currently at the centre of major socio-economic and technological trends. A period of global market volatilities and record-high inflation is creating retail pricing’s most stubborn headache, occurring at the same time as its largest opportunity for advancement: Seismic leaps in AI, machine learning, and automation. After adjustments for inflation, only 52% of companies across 13 industries and 19 countries expect real revenue growth in 2023 – the lowest number in decades. In essence, retail and branded goods pricing today is a reflection of what is going on in the world. How are consumers and retail leaders alike dealing with and responding to these trends? How can brands and retailers keep their heads above water? In this article, we will discuss key trends affecting retail pricing, e-commerce, and consumer behaviour, and will offer vendors tried-and-tested pricing and commercial strategies. Market volatility: Inflation, food and gas increases, and consumer suffering For consumers and businesses alike, inflation seems to be the waterproof mascara of the retail industry – hanging on a little too long and doing its job a little too effectively. Europe began 2022 with 5.8% inflation in February, which only increased throughout the year to 9.1% in August. Simultaneously, the UK experienced a 40-year record-high of 10.1% inflation in mid-2022, while in the US, the average inflation rate sat at 6.5% for the year. Even as we enter the second half of 2023, retail pricing is still feeling the effects as brands and retailers maintain higher prices to offset the cost of inflation. Gas prices in Europe increased by 150% between July 2021 - 2022, while food costs are sitting 17% higher in April 2023 versus the year earlier. In Germany alone, cheese increased by 40%, according to the country’s Federal Statistical Office. As food and energy costs remain high and barely manageable, consumer suffering has resulted in more conservative spending and a shift to less expensive brands. Most notably, high- and low-income households are both cutting down on spending, with spending growth from high-income shoppers sitting at -3% for two months in a row, May and June, for the first time in two years. Retail pricing increases in Europe, as of April 2023 Source: Eurostat 2023. Year-over-year changes in EU food price inflation vs the United Nations global food commodity price index: Source: Food and Agriculture Organization of the United Nations, Eurostat. This change in consumer behaviour, coupled with stubborn inflation, has created a deadlock for retail pricing beyond food. Brands and retailers can’t afford to decrease prices without suffering significant losses. At the same time, consumers aren’t able to maintain the same spending habits they were used to before inflation became a consistent reality in the shopping cart. Consequently, brands and retailers need to react in creative ways to fuel growth and stay profitable. For this, we have identified three levers to succeed under these difficult market circumstances. Talk to one of our consultants about dynamic pricing. Contact us Pricing Innovation: Digitalisation of pricing and the development of dynamic competition Dynamic pricing is not as established as the industry of pricing itself. Set pricing without haggling or bargaining first occurred in the late 1800s when a shop owner, John Wanamaker, placed a price tag on an item in Philadelphia, USA. Implementing a pricing strategy and tracking price changes has largely been a manual task with some form of a digital blueprint or spreadsheet to keep track. Today, the convergence of the availability of large data volumes at a decent quality, fast computer processing power, and, ultimately, advanced analytics and AI have made it possible to apply dynamic pricing automatically at high speed. Today, dynamic pricing is not just used in airlines or hotels but also in e-commerce and online retail. According to a June 2023 study conducted by Horváth, using digitalisation to boost efficiency in areas like pricing processes was at the top of the list of industry-specific needs, with 55% agreeing that it would have a high impact, showing just how effective dynamic pricing has become. In addition, Horváth found that 30% agreed that implementing AI in business rules would also have a high impact. There are various pricing strategies brands can implement to improve profits, increase market share, and strengthen customer relationships. The beauty of dynamic pricing is that it can bring together all these different strategies at once while the application of specific rules is automated. Here are two leading pricing strategies in the omnichannel retail world: Penetration Pricing: Prices are initially set low to attract customers and increase market share. Once the brand is well-established, dynamic pricing can be implemented to adjust prices upward. Some e-commerce vendors use price scraping and dynamic pricing to out-price competition, often leading to a pricing war to make quick sales. Some firms play this strategy quite aggressively by promising customers to match any lower prices found by a competitor for the same product or service. This can be effective for winning over price-sensitive customers or market share. Competitor-based Pricing: This strategy typically pegs prices to competition. Prices do not need to be identical but might be slightly higher or lower following specific price difference rules or article family roles (e.g., private labels are always cheaper than competitors’ branded goods). For instance, above-competition pricing involves setting your prices higher than your competitors. It's often used by businesses that offer superior products or services and want to position themselves as a premium brand or to skim margins. To be successful with this strategy, the price adjustments to competitors need to be powered by the use of software monitoring competitors on a daily basis at an SKU level. Competitor-based pricing is typically different across SKUs and segments, hence, different strategic considerations and price differences might be applied. D2C: Brands are moving to direct-to-consumer (D2C) e-commerce in their masses Over the last decade, brands have increasingly shifted toward the “direct-to-consumer” model fueled by digitalization and e-commerce. The change began slowly in the early 2000s but has accelerated in recent years, with large brands like Nike pulling their stock from retailers starting in 2017 to focus on a curated D2C strategy that includes their own website, mobile app, and concept stores. D2C Ecommerce Sales Growth by Company Source: Insider Intelligence - D2C Brands 2022. (US, 2022, % change) However, when the Covid-19 pandemic arrived, along with lockdowns and supply chain blockages, brands of all sizes found a way to keep the machine moving by going D2C. Brands and wholesalers that were historically B2B (business-to-business) have found pricing success within the D2C channel, experiencing higher sales and revenue. However, the D2C move does not come without its difficulties for retail pricing. Brands that have their products in large retailers, supermarkets, and online marketplaces have to tread lightly so as to not agitate or create a competitor out of their retailer partners. Most brands who have retailer partnerships should expect most of their revenue to come from them, so a D2C pricing strategy should not alienate a brand from these lucrative streams of income. Brand leaders must learn to curate their offerings to please both the customer and their B2B partners. Here, strategy plays a key role, such as advertising Recommended Retail Prices (RRPs), following a strict minimum advertised price (MAP) strategy like Apple, implementing discounts, and retailer partner incentive schemes that align with the company’s overall strategies. Data and retail analytics: Attracting the customer in a whole new way Data has become a billion-dollar value driver, as it becomes the centre of industry and revolution, surpassing oil. It powers the question at the centre of capitalism: What and who drives a consumer to spend? With data and retail analytics, brands and retailers can create products and marketing and sales strategies that are better curated to what the customer wants. On an individual level, this data provides retail leaders with a blueprint of what customers are looking for, what they have purchased in the past, what kind of additional offerings they may want from a brand, and more. As British mathematician Clive Humby said in 2006, data is not precious in its raw state and only becomes valuable when it is refined, filtered and turned into something valuable. In the last decade, but more so in recent years, transforming big data into smart data has been at the crux of e-commerce success and customer acquisition for marketplaces like Amazon and Google Shopping. However, this success is extending to individual brands who, through their new D2C channels, can obtain the same smart data. This, of course, includes pricing data that is collected directly from e-commerce stores, larger marketplaces and retailers so that our clients always have up-to-date knowledge on market and pricing changes against their products. More than a decade ago, gaining pricing knowledge on competitors was secretive, elusive, and difficult to obtain. Thanks to developments in software, computing power, data mining, and Machine Learning, pricing data has become available for almost anyone to gather and utilise with transparency. In essence, brands and retailers are viewing data and retail analytics as a key to the locked door of growth, profit, and opportunity. This does not mean all data is of a high standard; in fact, along with the aforementioned developments, it has become easier for data mining companies to harness and sell data that has not been vetted thoroughly. It is up to brands and retailers to ensure they are partnering with a company that treats data carefully and meticulously. Pricing professionalisation around strategy, analytics and software is key for brands and retailers Considering all of the trends currently taking place within retail, e-commerce and consumer behaviour, retail pricing is operating during a complex and fast-moving time where socio-economic and political factors, as well as technological advancements, play a large role in how prices are calculated and how this affects businesses and consumers. Smart brands and retailers react quickly and use major trends to their advantage by upgrading pricing strategies, smartly playing omnichannel strategies, moving closer to consumers, and leveraging advanced analytics in pricing. Pricing software will be a linchpin in this transformation: Gartner found that pricing software can yield higher profits of up to 5% and margins of up to 10%. By using pricing software as a solution, brands and retailers can execute faster, data-driven decisions that are centred on driving growth and profit. Omnia and Horváth believe retail pricing is nearing the end of the post-Covid slump, where we gradually see inflation easing off and consumer sentiment improving within the US markets, and the EU still slightly lagging behind. Now is not the time for brands and retailers to buckle under these coinciding trends. Pricing needs to be prepared for the next strategic and technological level so that firms can double down on growth and margin targets over the next few years. Acknowledgements: We extend our thanks to one of our consultancy partners, Horváth, for their collaboration and insights on this article. As a leading multinational consultancy firm in Europe and the USA, Horváth specializes in performance pricing management and transformation.