A 5-minute read to one fix
The global supply chain situation shows no sign of abating. In just the past week alone, the Wall Street Journal reported that, as of October 7, nearly 500 large container ships were waiting to dock in North America, Europe, and Asia. The same article bemoaned supply issues across the board from auto manufacturing to Christmas trees and Scotch Whiskey.
While there’s not much we can do at this juncture to speed everything up, retailers can find short term relief and lay the groundwork for better decision making in the future by implementing pricing and merchandising strategies that can help mitigate the current situation.
A quick refresher in Microeconomics 101 will remind us that “the law of demand says that at higher prices, buyers will demand less of an economic good.” This seems like a simple enough process in theory but in real life, we know that there are goods which have price elasticity curves and others, like food, medicine, and other necessities, that are inelastic.
Today, with a $4 Trillion savings rate in the United States, Americans will spend more to secure the goods that they really want. According to the Kansas City Federal Reserve Bank, the savings rate has leveled off since the height of the pandemic, but still stands at 14 percent, which is twice as high as it was pre-pandemic. This extra savings emboldens consumers to “treat themselves” to items that they feel they deserve, or gifts they really want to give. So price elasticity, along with the demand curve, is out of whack.
Optimizing pricing is more of a science than an art, especially today as prices for everything from fuel to containers continues to rise.
Retailers have traditionally used what is called a keystone to determine pricing. This is a simple rule-of-thumb which takes into account the margin the retailer wishes to make based upon an easy formula of essentially doubling the purchase price. There are other more traditional pricing strategies retailers use, from undercutting the competition to bundling promotions. However, these strategies are not really viable in the current environment. Retailers leave money on the table when they don’t dig a little deeper and get information—from the consumers themselves—on what they would pay for any single item. Executives sitting in the decision maker seats need to keep embracing change and look to technology firms for solutions that mitigate risk by decreasing forecast variability. This simply can be done by engaging with Customer Experience Management platforms that can deliver Price Elasticity and Intelligent Assortment capabilities.
Price elasticity helps forecast the average selling price before the product is launched and effectively prices items from the start allowing retailers and brands to quantify retail market demand for an item at different price points. In today’s current scenario where demand is outstripping supply, retailers and brands have the opportunity to rethink their promotional strategies, particularly as we head into Holiday. In order to survive and thrive, retailers must leverage price optimization tools to understand and maximize revenues by understanding which products can command full price and which products to markdown.
Assortment correlates closely to price. Having a merchandising plan that can allow for some flexibility is another way to offset future supply chain disruptions and pricing issues.
Sales and revenues can be optimized by understanding the best assortment mix per channel which can be used to attract new customers. By testing the assortment and ranking the individual components of that assortment by popularity, retailers will have fallback data to rely on in the event that any of the individual components never made it onto the boat. Retailers can put more of the tested stock into the best performing channel to drive sell through. Boosting the marketing on the remaining components can also help to bolster sales and potentially reach an even broader audience segment.
Aligning with consumer expectations makes good business sense regardless of the economic environment. Understanding what your customers want and how much they will pay for it helps mitigate many of retail’s travails, including mark downs, dead stock, and waste.
However, in today’s world of empty shelves, unknown delivery dates, and shortages on everything from sneakers to cars, a smart, data-driven pricing and merchandising strategy will help retailers better meet demand. Or, maybe the industry should just go back to relying on gut instinct and good guesses (isn’t that what Amazon does?... NOT).
