Making the Right Pricing Decisions During the Holiday Season

The holiday season is almost upon us, with sales starting on Black Friday — and often even before then these days — and running through New Year’s. Retailers are looking to do whatever they can to get consumers to purchase from their business during this busy shopping period. There are many factors that influence each step of the buying cycle for consumers. Price, promotion and assortment are clearly important, but there's a point where a price drop no longer attracts enough customers or where competition has to react to defend their customers, blunting the effect. The question is, where is the point at which retailers are compromising their margin, but not gaining any more sales or profit?

For retailers battling it out for sales at a time that determines whether they make it into the black for the year, it's critical to keep a level head and not discount purely to undercut competitors. The impact may not be negligible.

Is it About Price Alone?
Of course it's not just a matter of whether to discount and how much, but in what way do you offer that price? Is it straight discounting across the board, category-linked or designed to encourage volume purchasing? And, of course, sometimes promotions have to be developed in response to what's happening in the rest of the retail market, often forcing retailers to make promotional decisions that aren't necessarily in line with the buying decisions and margins they committed to for the season nearly a year ago.

Making price and promotion decisions purely in terms of the competition, margin and sales volumes is a common mistake. The truth is that without the right scrutiny, retailers could be pushing customers away from more profitable lines or, worse yet, combinations of lines that they would otherwise be buying.

Retailers need to understand which products are the right lines to discount or promote, and which, when promoted, will actually drive incremental sales and margin over their baseline sales. Often the products retailers promote are cherry-picked by customers and never lead to incremental basket sales. How can you know what to do?

It Takes Much More Than Data
Insight is the answer to all of these problems. The issue is that the vast majority of retailers have spent huge sums of money implementing systems that ensure they sweep up every piece of data into a big data warehouse. Why is that a problem? It's happening so fast that they have tons of data, a little information and even less insight.

The whole challenge is made all the more complex by external factors, all of which can be used as data to inform decisions — competition, weather or the economy, to name a few. All of these impact the behavior of the customer in real time and affect their sensitivity to price.

You probably thought I meant “giving away too much discount” at the start of this article, but the impact of poor insight is much bigger than discounts or promotions. True, you could end up giving away too much in terms of margin, but worse, you could lose your customers to the competition. You also might be giving your loyal customers too big of a discount for no real gain or only attracting the cherry-pickers from your competitors, not your target segment.

It's a Team Effort
You cannot just rely on the data; the business has to be organized in a way that has formal processes for reviewing the insight, and applying it across marketing, promotions and category teams. That means having people embedded in teams that can understand and manipulate data to determine the best course of action. You have to be able ask the data the right questions, and that takes specialist data science skills. Otherwise, you might be getting answers to a different question than the one you thought you asked, making the subsequent action you take completely wrong. Taking these steps helps all teams learn the limitations of their data, and trust the insight it gives them.

The Future Can be Merry and Bright
It might be too late for this holiday season if you don’t already have the systems and processes in place to get the kind of insights I've outlined above, but there's plenty of time to prepare for next year. Online retailers, in particular, are becoming extremely agile and adept at quickly reacting to customer behavior. You might get away with it this year, but in the same way that consumers are becoming insight-driven, retailers must do the same.

Brian Elliott is CEO of Periscope™ By McKinsey, a platform that offers a suite of marketing and sales solutions.