Inflation is currently at the highest level seen in 41 years. As supply chain disruptions wreak havoc on energy and food prices, resulting in scaling price increases that haven’t been seen since 1981, inflation is unlikely to fall to pre-pandemic levels for some time.
Sixty-six percent of consumers believe that some retailers are doing a better job than others at mitigating these price increases. In this new world of high price awareness, data-driven insights and responsive pricing strategies are given increased importance.
The holiday season of 2021 saw consumer spending decrease through substitutions to lower-priced retailers, more emphasis on promotional buying, and consumers even foregoing spending on non-essentials such as electronics and travel. These consumer behavior changes pose real challenges for retailers. The category-specific demand variation requires them to make different pricing decisions at a granular level. The decision on where to pass on costs to consumers needs to be well informed and thoroughly tested.
The key to responsive pricing in uncertain times is to prioritize science over gut feel. The broad price increases due to inflation is not the right course of action for retailers. More than 90% of customers plan to change their behavior in response to price increases. This shifting consumer demand as well as lower brand loyalty, coupled with increased omnichannel competition, means that premature price increases could lead to extreme demand responses from customers. Nevertheless, repricing is necessary in order to manage cash flow, sustain margins, and grow sales. To preserve market positioning, decision speed in inflationary times must also increase tenfold.
Price dynamics go beyond retail pricing and affect all parts of the supply chain. With demand for certain products hampered by increased inflation and the cost of replenishing inventory going up, some retailers have chosen to “sit” on a set of their inventory. This artificial decrease in supply works to drive prices up and unit sales down while waiting for consumer demand to catch up. It allows retailers to save enough inventory to sell at higher prices later on, shielding themselves from rising procurement costs in the process. While the inflationary effect on costs may be temporary for some products, for others it’s likely permanent.
Sitting on inventory can extend to delisting some products altogether, to increase the value perception of certain categories by limiting the number of premium products available. Product-specific pricing elasticity must also be considered, and steps are taken to avoid the concealment through category-wide metrics. This assortment-shrinking strategy can be coupled with category-focused replenishment forecasting and an expansion of private label sales through lower pricing to increase sales and meet customers’ essential needs.
These tactics require a structured and automated way to incorporate variables like time-sensitive inventory, sales rate and fluctuations into supply prices. They need to be assessed together to predict future selling prices, supply costs and renewal dates. While retailers will eventually need to replenish their inventory, they can use predictive models to maximize the value of their current stock to avoid potential cash-flow problems. Forecasting past the volatile period further increases complexity. Retailers must manage the current lower demand and cost pressures while preparing for long term profitability once the inflationary volatility settles.
This level of sophisticated response poses challenges for retailers that have outdated processing methods. Increased price awareness, lower customer demand and higher replenishment costs put the spotlight on retailers to excel at agile pricing. Agile pricing is an optimized pricing approach that allows retailers to adjust to the market automatically on the basis of pre-existing rules. In an inflationary environment, deploying such a tool becomes necessary to automate, manage and optimize prices in response to changing market variables.
Agile pricing works through an initiative-based approach that centers on a list of pricing tools that are implemented continuously. During inflationary periods, an automated pricing application for key-value items (KVIs) might make the top of the initiative list, but long-tail pricing, top seller inventory management and competitor-based pricing are likely not far behind.
While retailers may read signals such as temporary increases in basket size as indicative of returning demand, any gut feeling response by releasing inventory too early can result in leaving money on the table. Data science and artificial intelligence go beyond single variable decision-making and gut instinct. The use of predictive analytics based on historical information and machine learning ensures the right price response at the right time. This opens the door to counterintuitive pricing strategies, such as lowering prices on KVIs during the inflationary period, in order to retain increasingly cost-conscious customers.
Data science also extends to long-tail products with sparse data. Consumer behavior and similar product sets are used to model and predict demand for these products, thereby allowing retailers to optimize the tail end of their inventory as well. This means avoiding inventory buildup on low unit sales products along with inventory management of high sell-through inventory.
Pricing is a continuous process. Agile pricing allows retailers to test multiple scenarios and data points to find the optimal price for a given product at a given time. This iterative process provides retailers with inflation protection in an automated manner. The response-and-adapt cycle of pricing ensures that time-misaligned changes in replenishment costs and consumer demand are continuously forecasted and adjusted automatically. This paves the way for a resilient pricing strategy.
Yossi Cohen is co-founder and chief technology officer of Quicklizard.
