The Science of Pricing During a Crisis: 3 Strategies to Keep Retailers on Track and In Sync

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The Science of Pricing During a Crisis: 3 Strategies to Keep Retailers on Track and In Sync

By Cheryl Sullivan - 05/11/2020

Even before COVID-19, the retail landscape was challenging, with the rise of global online giants such as Amazon into virtually every sector; shoppers with full price transparency across every channel; every retailer and every item asserting unprecedented power; and an overbuilt physical store infrastructure that led to the gutting or even collapse of countless malls. 

Now those not-so-long-ago days seem almost quaintly simple. In recent months tectonic shifts have rocked the industry globally, from bruising tariff and trade wars to an unprecedented global pandemic that has upended supply chains, eviscerated employment and driven spending on perceived survival items at devastating speed, radically shifting the mix of assortments, shopping channels and fulfillment. 

It’s reasonable to assume that even after the current wave of COVID-19 abates, the likelihood of yet more unforeseen crises remains. Fortunately, there are proven strategies retailers can undertake to get pricing right in a crisis: The one constant in all the chaos is that price remains all-important to shoppers in every sector. 

1. Structure your pricing systems & processes on the assumption that crisis is the new normal 

This means remaking every part of your business to support agility in responding to both large and small changes, with the ability to quickly gain in-depth insights into changes in shopper, competitor and market behaviors. 

The good news is that today’s AI-driven price optimization tools can accurately separate demand signals from the noise and detect evolving price sensitivities and elasticities in real time. The systems enable retailers to automate pricing processes to embrace frequent, even dynamic, price recommendations that support the retailer’s preferred price image within defined business parameters set by the pricing team in collaboration with the merchants.

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The result: prices that are relevant to shoppers in current conditions, and that are perceived as fair, while also sustaining the margins in the overall mix to achieve business goals. 

2. Focus on the long-term customer relationship and business structure 

In short, don’t get blinded by short-term opportunities that can do irreparable damage downstream – and permanently – to your relationship with valued loyal shoppers. Recent research has established that shoppers are very tolerant of frequent algorithm-based price updates as long as they perceive those prices to be fair and non-arbitrary. 

Sudden surges in demand or broken links in the supply chain can create the temptation to profit in the short term, but shoppers who perceive retailers as taking advantage of them are driven straight into the arms of competitors – likely never to return.

Leveraging science-based price optimization enables pricing teams to do what-if scenario analysis to understand exactly how a given price change will affect shopper behaviors, factoring in a wide array of variables with complexity that human-driven modelling could never support: affinity and cannibalization/substitutability effects, competitive pricing, shopper price sensitivity, seasonality and demand signal analysis weighted toward the most recent data to address real-time market conditions.

3. Look holistically at the whole price lifecycle

This includes looking at initial and ongoing everyday pricing to promotions and trade deal management all the way down to markdown and clearance. Even when the market is not in crisis mode, digital natives embrace trendy new products at warp speed, from Acai berries to coconut water, CBD, athleisure wear – the list goes on. 

See also: 3 Digital Trends That Will Stick in the New Post-Pandemic Retail Landscape

As COVID-19 unfolds we’ve seen demand for toilet paper, sanitizing products and shelf-stable foods take off, just as the quest for meat substitutes is likely to skyrocket as the fast-moving meat shortage emerges. Retailers need to have a fluid, data-driven approach to refreshing their list of Key Value Items (KVIs), adjusting their everyday prices, collaborating and negotiating trade funds with their vendors, knowing which products to promote with what promotional vehicles and channels, and when to move a product into clearance mode, optimizing the cadence and depth of their markdown plans to achieve optimal business results.

Retail has never been for the faint-hearted, and the environment today and for the foreseeable future remains daunting. Fortunately, retailers who strategically adopt and use modern, data-driven price, promotion and markdown tools can compete more effectively and profitably – all while presenting their shoppers with prices they that engage them on the products they care most about.

Cheryl Sullivan is president of DemandTec by Acoustic.

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