Decoding Price Elasticity to Unlock Revenue and Minimize Risk

It’s no secret that there has been a shift in shopping behavior due to growth in millennial spending power, aging of baby boomers and the growth of online shopping. These changes are impacting pricing and demand, and are creating a disconnect for retailers and brands between what they're charging and how much consumers will actually spend. First Insight recently released a study, Decoding Price Elasticity to Unlock Revenue and Minimize Risk, which examines how retailers can best price a category to meet demand while protecting margins and avoiding excess inventory.

Our study examined pricing and price elasticity trends on more than 90,000 items between September 2015 and August 2017, along with other sources. These data were processed through InsightSuite, First Insight’s predictive analytics platform, which enables retailers and manufacturers to select, price, market and buy new products with no sales history.

A key finding is that a lot of companies are lowering prices when they should be increasing them. For example, in womenswear, research showed significant opportunities to increase pricing in swimwear, but also revealed a pricing peak for dresses and outerwear. Menswear revealed a different story, with shoppers becoming less concerned about pricing in the underwear category while remaining more watchful of pricing for bottoms.

While women are buying fewer new clothes than we’ve seen historically, the study revealed that shoppers in the women’s apparel category overall are becoming less concerned with price as elasticity is trending downward. This is great news for retailers. Even at the subcategory level, in addition to swimwear, historically more elastic categories such as lounge/sleepwear and lingerie are becoming less elastic.

Simultaneously, retailers are actually decreasing or holding steady on prices in these subcategories while everyday purchases such as women’s outerwear, accessories and tops are experiencing an increase in elasticity. These trends are consistent with the shift in shopping behavior as older shoppers are buying fewer items, and millennials, who are drawn to fast-fashion brands, are driving greater elasticity in these everyday purchases.

The menswear category has been growing over time and opportunities in specific subcategories have emerged. Looking at men’s footwear, elasticity is falling, giving retailers the opportunity to raise prices. Outerwear, which has traditionally been a less elastic category, has more opportunities for price increases. However, tops seem to be well-managed, showing an upward trend in elasticity with a reduction in prices by retailers offering promotions.

Most retailers have been effectively balancing price with rising elasticity overall, but product differentiation is still key. In some subcategories, significant shifts have shown opportunities to increase pricing, while in other categories pricing should be stabilized. Historically, underwear has been more elastic, with retailers lowering prices in response, but First Insight data shows a significant decrease in price elasticity. This means retailers should view it as a prime target for steadying or even increasing price.

As this shift in shopping behavior continues to have an impact on retailers and brands, the key determinant of success or failure is offering the right product at the right price. It’s clear that many retailers and brands don't fully understand how to adjust pricing in response to elasticity across many retail categories. In turn, they're exposing themselves to potential excess inventory by pricing items too high or surrendering margins by pricing too low. By understanding pricing elasticity, retailers can have the greatest opportunity to increase sales and revenues while diminishing overall risk.