It's no secret that today's retail environment has morphed into a highly competitive and dynamic market. While consumers' demands for price transparency continue to reach new heights, consumers' brand loyalties continue to reach new lows.
And if this was a challenge for retailers pre-pandemic, it has only been intensified in the COVID-19 era, as personal financial strain and economic uncertainties have placed an even greater emphasis on price during purchasing journeys.
Despite the escalating importance of pricing on a retailer's top and bottom lines, pricing decisions aren't always made in a strategic and centralized manner at retail organizations – especially during times of disruption.
In many ways, this is perfectly understandable. Retailers have dozens (if not hundreds) of priorities they are currently grappling with – from keeping up with safety regulations at stores to opening up new service models and revenue streams to planning inventory in an unpredictable world. It's tough out there.
While there is, undeniably, a record number of strategic initiatives retailers will need to consider for 2021 – spanning people, processes and systems – here's a reminder of why price optimization needs to be a top priority for retailers in 2021.
1. The Impact of Price on Demand (and the Role of Elasticity) Cannot Be Ignored
There is no shortage of ways retailers can effectively drive demand – from a viral TikTok video to a celebrity endorsement to the more traditional methods of offering a great selection of products and highly relevant marketing campaigns.
But no matter how impactful your marketing, e-commerce, store ops or other levers might be, the reality is this: The fastest way to generate demand and spur quick change to a business's bottom line is with pricing.
Considered one of the most basic (yet powerful) concepts in retail is the fact that when a product's price goes down, the result is typically an increase in sales of that product. But like most things, it gets more complicated from there, as retailers must also consider price elasticity, which is used to measure the relationship between price and demand and how changes to one will affect the other.
If a product is elastic, changes in price will have a higher impact on demand. If a product is inelastic, pricing changes will have a relatively low impact on demand. Knowing the elasticity of your products is key to determining how customers will react to price changes.
With an AI-powered price optimization solution, retailers can effectively calculate millions of elasticity values and dynamically adapt them as demand shifts. The result: more value generation, improved forecasting capabilities, and the optimal balance of price increases and decreases to drive profitable demand.
2. Will Dynamic Pricing Be Your Competitive Advantage – Or Your Competitors'?
It is widely accepted that COVID-19 accelerated many trends that were already in flight – and when it comes to the adoption of dynamic pricing, this certainly applies. Dynamic pricing, of course, is nothing new. Even Wikipedia has an established definition for it:
"Dynamic pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands."
But what did change with the pandemic – and what retailers should prepare for in 2021 – is the fact that the benefits offered by dynamic pricing can only be fully realized if you move faster than your competition.
Here's an example:
Say you make pricing changes on Tuesday, but your competitor can change prices every day of the week. If they drop to a lower price on Wednesday, you will lose an entire week of price perception before you can react. And once you do match or beat their price, they can simply adjust again as well and continue the pattern of winning 6 out of 7 days every week.
While you shouldn't make huge pricing shifts, you should be able to make small changes quickly. Improving your price perception is highly dependent on your capability to price more frequently than your competition. Even the best strategies will make little difference if your competition has the speed and technology advantage.
3. Controlling Your Price Perception Starts with a Centralized Strategy
The global pandemic makes it necessary for pricing best practices to be more urgent, more actionable and – most of all – more strategic. The absolute best practice for pricing strategy is to actually have a strategy and not a collection of tactics that don't amount to a greater objective.
While there are a lot of lower-priced discounters and premium retailers that put strategic emphasis on how they want to be positioned in the market and price accordingly, there are even more retailers that struggle with establishing a pricing identity.
To survive and thrive in 2021, retailers need to create a centralized strategy with strong leadership, adoption and governance to drive improved price perception while achieving financial objectives at the enterprise level.
By establishing a strong price perception in the market, retailers can best influence consumer buying behavior and elevate their market position.
Make Pricing a Priority for a Profitable Future
There is no better time for retailers to reset and create a pricing structure for tomorrow – one built on the analytical tools and data that enable enterprises built for change.
As you prepare your price optimization strategies for 2021, keep in mind the importance of transparency and adaptation.
Just as consumers have access to price transparency in an omnichannel world, you too should expect transparency from your price optimization solution – and fully understand how specific pricing decisions are being made.
Finally, keep in mind that pricing should be a continuous cycle of measurement, adaptation and improvement. If you follow these tips, deploy the right technology, trust the data and listen to the customer, you will be able to craft an effective pricing strategy that will benefit business objectives and build customer loyalty in 2021.