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09/09/2021

Inflation Fears Increase Demand for AI-Driven Prices & Promotions: How Retailers Can Deliver

Unprecedented periods of change require rethinking processes, automation, technology and agility for future-proofing the retail pricing lifecycle approach.
Unprecedented periods of change require rethinking processes, automation, technology and agility for future-proofing the retail pricing lifecycle approach.

Retailers who were beginning to breathe a sigh of relief in view of rejuvenated consumer spending just a few weeks ago now are faced with renewed uncertainty. The rapid spread of the Delta variant and the specter of inflation have shoppers and retailers alike on edge.

Meanwhile, profound changes in shopper, competitive and market behaviors that developed during COVID, such as the shift to online channels and unprecedented changes in the items shoppers pay most attention to prices on — key value items (KVIs) — show no sign of returning to pre-pandemic “normal” patterns.

Delivering exactly the right prices and promotions to engage price-sensitive and value-minded shoppers is more important than ever, and the prevalence of online price-checking means complete price transparency. Retailers who get it wrong, if only briefly, can lose shoppers for good to more agile competitors.

[Related: Retaining the New Consumer Through the Power of Technology]

Fortunately, today’s AI-based price and promotion science can equip any innovative retailer with the ability to deliver surgically crafted prices and promotions that accurately calibrate to shoppers’ expectations amid the pressures of inflation, and ultimately to achieve the elusive win-win: prices and offers that engage target customers on the items they care most about, while strategically (and safely) recovering margin elsewhere in the assortment to meet target margins and profits.

Last Year’s Promotions are SO Last Year

While some earlier promotion optimization solutions were targeted narrowly at optimizing a single promotion proposed by the category manager, a more contemporary approach takes a holistic view across the category as a whole. In other words, optimizing a promotion that you’ve always offered in past years, even if it accounts for the current inflationary environment, may leave you woefully out of synch with where your shoppers’ priorities are today.

AI-based promotion recommendations can identify productive offers that you hadn’t contemplated in the past, leveraging current demand signals and price sensitivity and elasticities to craft the right offers and vehicles for the right items across a category in its entirety.

A recent global study revealed that shoppers are paying more attention to promotions than pre-pandemic, particularly online offers. For example, 48% say they use mobile app offers more often than pre-pandemic, and 43% similarly respond more often to online ads.  

In looking across an entire category, modern end-to-end promotion AI also takes into account cross-item effects to create promotion recommendations that recognize, for example, that a promotion that drives units on one item but that deeply cannibalizes the overall category misses business targets. Similarly, promoting an item that has a halo-effect for other margin-rich items may allow for a more aggressive promotion while still delivering financial goals. AI driven promotions, including prescriptive promotion recommendations, unlock long-term success in volatile environments.

Right-Pricing Across the Assortment, Including Private-Label

With more than half of consumers (54%) concerned about inflation driving price increases, shoppers indicate that not only will they be on the lookout for promotions, but they will also switch to lower-priced brands. Retailers may at times be mindful of the visible top-line benefits of inflation at the expense of accounting for the negative impact of their own rising costs.

Under inflationary pressures, retailers will need to be surgically focused on knowing exactly where they can safely pass costs along through price increases, and where they need to absorb some costs to avoid driving away loyal shoppers. As you might guess, it once again comes down to leveraging AI-based price optimization capabilities that automatically keep pace with real-time demand signals, KVIs and price sensitivities.

But there’s also an opportunity to aggressively position store-brand items in the assortment. Many retailers have invested in growing the number of private-label items they offer, and these are typically margin-rich products relative to their name-brand competitors.

[See also: Top Grocery Trends 2021: Reinventing the Customer Experience]

Moreover, in the pandemic era shoppers have grown much more accepting of private-label products. The same global shopper study that keyed in on changing promotion preference also revealed that 80% of shoppers consider private-label offerings to be of similar or higher quality than national brands. Using price science, retailers have a golden opportunity to identify which private-label items will resonate most with shoppers and price them to entice a switch from national brands, winning long-term loyalty to house items that make outsize contributions to the bottom line.

Right Science, Right Timing, Right Pricing

Unprecedented periods of change require rethinking processes, automation, technology and agility for future-proofing the retail pricing lifecycle approach. In my direct discussions with retailers globally, they are acutely aware of the importance of helping to define and embrace next-generation automated lifecycle pricing capabilities. Fortunately, road-tested science is broadly available to support retailers in their quest to deliver engaging prices and promotions, win shopper loyalty, and ensure healthy business results.

Craig Marion
Craig Marion

As global head of product strategy for DemandTec lifecycle pricing solutions, Craig Marion brings 20 years’ experience developing, architecting, implementing, selling and managing enterprise software with the goal of delivering customer value to a full range of retailers worldwide. Prior to joining DemandTec, Craig served in executive roles at organizations including TJX, where he was senior solutions architect, Revionics, Siemens, Oracle Retail and Exeter Group.  

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