The Future of Retail Pricing
Price inflation has been THE hot topic of 2022. About two-thirds of the S&P 500 mentioned inflation in their latest earnings calls. In Retail, pricing is even more of a focus as the average CEO mentioned inflation 19 times. Leading retailers like Kroger, Walmart and Costco referenced inflation more than 30 times.
In 2022 consumers are paying 13.2% more for fast-moving consumer goods. Consumers have had nowhere to hide as promotion frequency and depth of discount have dropped significantly. While inflation is cooling slightly, with prices “only” rising 47 basis points in November, our clients are telling us they are investing in technology and data science to better manage their pricing and promotion strategies in 2023:
Retailers leveraging price and promotions as a strategic differentiator in 2023, will see a 2-3% increase in revenue, 1-2% increase in store traffic and a 5-8% margin expansion.
- Leveraging Technology to Increase Competitive Visibility: Retailers are experiencing rapid increases in cost of goods and need to ensure that their prices remain competitive. For years, retailers have leveraged manual data collection and by-hand item linking to track competitors’ prices. With cost increases coming across the entire store, this is simply not scalable to today’s challenges. In 2023, we see retailers doubling down on their investments to leverage real-time competitive data collection and ML techniques to link their items to rest of market and expand competitive visibility.
A near unanimous trend we’re seeing is the evolution of how businesses view their competitive set. Traditional brick & mortar retailers are now monitoring e-commerce competitors and e-commerce businesses are increasingly matching their catalogues to conventional retailers to price more competitively and win market share.
- Focusing on Winning with the Items that Matter Most: As consumers’ wallets tighten, they will look at price value as the key driver of store choice. For retailers to increase traffic, they will need to improve shoppers’ price perception of their brand. Over the last 2 decades, retailers have leveraged econometric elasticity models and volume-based key value items to set their prices. These models drive up prices to improve short-term margin but don’t help improve price perception. In 2023, we are predicting that winning retailers will evolve their pricing strategies leveraging behavioral science to identify the items that matter most to their consumers. Winning retailers will selectively invest to reduce prices on the key items that matter most to improving their Price Image.
Our customers are increasingly recognizing that the items that matter most to their customers are not static or universal. Increasingly, retailers recognize and tailor their key item lists to account for localized demand by geography. The more segmented and localized your pricing strategy, the greater the financial return.
- Personalizing Customer Prices & Promotions: In 2022, promotion frequency and depth of discount declined significantly. For years, retailers have used promotions to drive traffic and create differentiation. With shrinking budgets, retailers will have to be smarter in how they deploy their promotion funds in 2023. We expect a significant rise in the frequency of personalized prices and promotions. To be clear, when we say personalized, we mean true personalization. True personalization leverages an understanding of each customer's price image drivers to create personalized omnichannel experiences vs. the “segment based” personalization used today.
Our customers are increasingly recognizing the importance of attributing their product data to enable them to better personalize their promotions and messaging based on customers preferences. Which items in your catalogue are likely to resonate with consumers who value health attributes? Which for those who value environmental attributes?
In 2022, retailers faced unprecedented inflation that pressured their pricing and promotion strategies. Retailers that are investing in the right technology will leverage price and promotions as a strategic differentiator in 2023. The stakes are high as getting pricing wrong can be a “life or death” matter for a retailer. But when done right, we expect retailers in 2023 that adopt modern pricing and promotion technology to see a 2-3% increase in revenue, 1-2% increase in store traffic and a 5-8% margin expansion.