RSR Research: Pricing Benchmark – Competitive Pressures
Through a special arrangement, presented here for discussion is a summary of an article from Retail Paradox, Retail Systems Research’s weekly analysis on emerging issues facing retailers.
Early analysis of RSR Research’s Pricing Benchmark reveals continued uncertain economic conditions and increasing consumer price sensitivity has shifted industry focus dramatically. Retailers seem far more apt to ignore the wealth of customer data available to them and look instead to competitors’ prices to make pricing decisions than they were just a year ago.
For example, last year, 63 percent of retail respondents reported customer purchase history as a very valuable input to help set prices. This year, that number dropped to 37 percent. Those highlighting the importance of competitors’ prices rose slightly, from 61 percent to 63 percent. We would intuitively assume this is driven by price transparency and the consumerization of IT, but the data tells a different tale.
It’s true that the number of retailers feeling the effects of price transparency have doubled from 10 to 20 percent, but retailers seem to believe consumers are just responding to the barrage of promotions thrown at them. After all, 38 percent of retail respondents continue to significantly increase the volume of price changes they send to stores and other channels.
It’s interesting to note that even as the number of price changes continues to rise, the percentage of retailers who are able to understand the impact of their pricing decisions has declined quite a bit. Last year, 50 percent of respondents cited this as a top-three operational challenge. This year it rose to 64 percent.
Another issue appears to be lack of internal education. Past research has shown adoption of pricing technologies rising. Now many respondents seem to have the tools available, but don’t quite know what to do with them (figure below).
This has moved to center stage as the most frequently cited organizational barrier to setting better and more compelling prices. It trumps organizational resistance to change, technology infrastructure issues and even data cleanliness.
We wonder whether budgetary concerns have led retailers to scrimp on training expenses and spend more capital on implementation. Perhaps users go in believing that commercial applications are now as easy to use as those found on our tablet computers and smartphones.
Overall, I must say I’ve been really surprised by these results. We’ve heard a lot of talk about "Big Data," but apparently not a lot of us are actually doing anything with it. We know the explosion of channels has everyone spinning, and door busters are an evil that get bigger and "badder" every year. Have we returned to old fashioned "Markdown Chicken," where consumers and retailers stare each other in the eye until one blinks? Only this time, it’s with a front end of really low prices to set the bar.
Discussion Questions
Discussion Questions: Why are retailers apparently struggling to understand the effects of pricing decisions and failing to capitalize on customer purchasing data? Does it have to do with general challenges around technology adoption, increasing price transparency or the economy and the resulting intensely promotional climate?
Retailers may struggle with this because they believe, without much evidence, that shoppers are always comparing prices. That belief trumps any analysis one might do that says there is a better way to price when the analysis leads to higher prices.
As usual, RSR provides some good insights and questions. It also outlines some of the causes, including lack of education, budgetary concerns, and inability to leverage pricing tools that have already been acquired. Based on my experience, even when retailers have acquired and implemented pricing tools meant to help them manage pricing processes, they continue to override these tools much of the time, based on individuals’ fear of factors like competitive pricing.
Bottom line, retail has become more competitive than ever with consumers that are less loyal and more price aware. If retailers believe they must first respond to and match competitive pricing before thinking through their pricing position based on their value proposition to their target market, then it sounds like we are in a world of “markdown chicken” as suggested in the article. The only way to get out of this pattern is to step back and really focus on the shopper, those who shop your stores today and those you want to shop your stores tomorrow.
It is certainly useful to analyze customer purchase data as input to pricing decisions. However, we must recognize that customer data is historical and is not always an accurate predictor of the future. This is especially true when coupled with a difficult and dynamic economic environment. In addition, customer purchase data often does not consider competitive activity. As a result, it is natural to look to competitive pricing as a benchmark.
However, the solution is not to reject customer purchase data but to build tools that consider the competitive activity and the changing environment as inputs to the pricing models.
There are several drivers here. First, promotional pricing is narcotic. It gives quick gratification and is much, much easier than actually having to analyze data and come up with a reasoned set of decisions. Second, most executive management got to where they are when promotional pricing was an accepted practice. Like all of us, in tough times, they will gravitate to what’s worked in the past. Finally, there is the simple fact that there is too much supply chasing too little demand.
When retailers such as JoS. A. Bank offers two suits free when you buy one suit; when food chains feature “buy one get one free” offers; when regular price has become a myth; when technology and its adoption is impacting on business on a daily basis; when the economy is weak and consumers search for deals … the marketplace waters get muddied up and retailers struggle to juggle all these factors as they seek the handle of success.
Maybe it is a simple as this: you can’t always fit 10 pounds of ever-evolving conditions into a five pound sack. Think about it.
There are still far too many retailers that rely on their competitors to set their pricing for them. Yes, staying within a range of the “price leader” on key high price cognition items is part of the puzzle, but for some, that is the beginning and the end of their pricing strategy.
With pricing optimization software, customer data, and an array of other tools, retailers have what they need to take “pricing” from the “anecdotal” process it has been over the years to a customer-centric based platform. But this can only happen when C-level leadership insists that pricing is more than a means to make the company’s P&L look better on paper.
To that end, some retailers that have invested in pricing software have turned it over to their finance department so that pricing can be manipulated to hit required margin rates, which in turn make the P&L hit the required numbers. But, more often than not this practice leads to lost customers, sales and market share. These are unintended, but very real consequences.
Pricing strategy must include the notion of being competitive, but done so to optimize profit and grow sales. There are retailers that are masters at this, but they remain a very successful minority!
If you’re a retailer, and you’re in an environment where price is a decisive competitive factor (and that covers just about every major national retailer), then it matters far less what consumers were willing to pay in the past than it does what your competition is selling it for now.
Very interesting data and discussion. I too would have assumed that the price transparency trend was the major driver; so it’s interesting to see that there is a mix of factors at work. The disturbing part is that the article describes retailers introducing increased complexity into their business without the analytical horsepower to understand what they are doing. As such, they run the risk of both raising costs and lowering revenue. Smart executives will make sure the analytics are in place to underpin their pricing strategy and/or, like Ron Johnson is trying to do at JC Penney, they will implement a simplifying strategy that rises above the trend toward almost constant price adjustments.
Uncertain economic conditions are the norm in this depression. Companies are forced to demonstrate profit growth at a predetermined rate established by investment groups with no idea of the true nature of the business type they are forecasting. What a mess!
This is one of the preconditions forcing companies to hire executives that are better at accounting than running a business. Pricing to manage sales for higher turns is now a means of leveraging profit results for the Wall Street Mavens to observe and grade acceptable. The real market value of product is abandoned and thought of as unnecessary information. This is validated using time as the determining factor even without any reference to the amount necessary to make a product value conclusion.
We should have learned that pricing with little or no regard to actual product value is the reason we have so many underwater and foreclosed mortgages placing us in this miserable economy. Deflation has its pain too, especially when coupled with rising variable costs, as we will see with the pending market saturation(s) causing slow turns and thus filling warehouses with the overstock.
The discussion question suggests the obvious. We are ignoring the consumer all too often as we develop retail strategies. There is no better example than cutting service levels to fund price cuts. Can you really cut your way to success? Home Depot proved a few years ago that you ignore the customer experience at your own peril. If you cut customer service, they will go. If you build it, they will come.
It is not “one” thing. We tend to look for simple answers to complex issues, then provide a convoluted solution. For consumers with incomes over roughly $125K, the recession is having less impact. They are buying. For the 40+% of HH that earn under $50K, they are still hurting and it gets worse every time gasoline takes a larger share of their wallet. Basically we have a very large segment of the population that are price sensitive and loyal only to their pocketbook. Of necessity they will price shop.
The effects are cumulative. We have taken large increases in food prices every year since 2008. Wages have not increased at the same rate. Gasoline has doubled in price since 2008. Let’s not underestimate the impact of ALL oil based products. Packaging is made from petroleum, shipping is affected by fuel costs, and the list goes on. Oil impacts the entire economy.
In response we have done some very silly things. We are reducing prices to unnecessary levels thinking it brings traffic and loyalty. Margins are at record lows for some categories, yet we still see drift to competitors and other channels. There needs to be balance, not knee jerk impulses to give away the farm.
For us in the retail business, all the data in the world will not bring customers into your store, unless you have a dynamic advertising program to bring them in. I look also at the wholesale pricing gap between the giant stores and us, and cringe figuring out a way to stay competitive. Retail is not for the weak, or newbies, as it takes all of your training, and the ability to create profitable sales that appeal to the price conscious consumer (about 95%) to make your store survive in these terrible economic times.
Work out better relationships with regional suppliers to boost your profit margins. There are plenty of deals out there for stores. You may have to look harder, or buy in larger quantities, but it is essential to keep customers coming back. I understand the “signature” item theory, but nuts and bolts values, with great service will go a long way competing for that valuable consumer dollar.
Verlin Youd said it well by stating that retailers typically “override” their software tools with gut feelings on pricing. The tools available today are robust enough to sift through the flood of both structured and unstructured consumer data, and determine the most profitable pricing tactics. This capability, along with promotion optimization strengths is helping forward-thinking retailers that aren’t too proud to let this technology do its work without unnecessary human intervention.