Attention Shoppers, Product Price War in Aisle 9
Another quarterly earnings season is in the books, and while there were a few star performers, it was another dismal one for retailers. It seemed almost a daily occurrence — headlines littered with the next retailer that struggled under the weight of aggressive competition and changing consumer preferences. We’ve heard this story before, and same goes for the reasons thrown about to explain (blame) the performance “miss.”
This commentary has sadly become mundane. However, it got far more interesting once discussions shifted to future strategies. Multiple retail bellwethers talked extensively about competing on price. Target plans to invest $400 million in price reductions in 2017, with more to come in its three year, $7 billion investment strategy to win back customers. Likewise, Wal-Mart is reportedly running broad tests to guide more aggressive pricing on key grocery items. Feeling the margin pressure from such reductions, Wal-Mart reportedly asked its suppliers to reduce their prices to offset the profit hit. It’s a vicious cycle.
Given the state of the industry, avoiding aggressive price competition is unlikely. For those preparing for battle, here are a few key considerations for surviving (and even thriving) in a price war:
Play to Win — But Only After You Know Where, When and How Much to Compete
Most retailers can’t afford to blindly follow the lowest market pricing (and they shouldn’t anyway). The good news is that you don’t have to meet or beat all prices on all products to win. The key is identifying which products are most critical to customer price perception and then understanding what results a price reduction will yield. Sounds great, but how do you go about identifying those products? The right predictive analytics can help eliminate these unknowns, identifying where, when and how much to compete to achieve your strategic objectives.
Act With Speed, But Also With Consistency and Confidence
Given the scale of most retail operations, technology is essential to enable successfully competing on price. In today’s hypercompetitive and dynamic retail environment, there's no doubt that speed counts. That said, well-informed, consistent and confident decisions trump fast decisions any day. Without the right strategy and analytics to guide these decisions, you risk investing in price decreases that yield far less return than expected, or worse, are dilutive to the business.
Pull the Price Lever, But Don’t Use it as a Crutch
The power of pricing to drive volume and profits is unparalleled. Used correctly, it can be highly accretive. Abused, it can lead to quick ruin. Today’s customer demands competitive prices, but also craves experience, brand connection and convenience (among other things). Price should absolutely be a key part of your competitive strategy — it just shouldn’t be your entire competitive strategy.
Today’s environment is taxing many retailers, calling for drastic shifts in strategy to survive. There is hope, however. We know of one retailer that was facing such an inflection point in its battle against aggressive online competitors. It leveraged sophisticated analytics to answer the key question: Where, when and how much should we compete to win? The brand's merchants now make confident, swift pricing decisions that drive revenue and profit day-in and day-out. Net result, online sales grew five times greater year-over-year, and “pricing” transformed from a feared unknown to a strategic growth lever.
With the right approach, you can compete and win in this market … without increasing risk.
Jared Wiesel is a partner at Revenue Analytics, a revenue management and price optimization company.