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Lifecycle Pricing a Powerful Strategic Tool

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While certain retail segments have always been driven by a “lowest price” mindset, two recent trends have forced virtually every retailer to focus on low pricing.

First, the recession led many retailers to cut prices across the board in an effort to regain sales and accelerate slow-moving inventory. Second, the rise of personal technology has enabled consumers to compare prices faster and easier than ever before.

The majority of retailers understand that razor-thin margins do not deliver profitability and growth over the longer term. But how can retailers shift away from this low-price mindset? The answer lies in developing more strategic pricing across the entire product lifecycle.

In setting everyday prices, retailers often spend more time reacting to competitors than studying how their own shoppers define value. This can shortchange margins and revenues. There will always be merchandise categories that are driven by price, but retailers have an opportunity to shape demand with an assortment that attracts consumers by delivering the features they value.

Retailers need to learn what their customers value in different markets, how they differ in their response to price and promotions across channels and how they can meet those needs with a mix and pricing strategy that is profitable. Doing so will allow them to drive purchases of higher-margin products, SKUs backed by strong manufacturer relationships and private-label products.

Fact-based approach to promotions
Retailers also need to take a close, analytical look at every facet of promotions to determine if the advertising spend, media used, discount, sales volume and cross-category lift will actually meet the event objectives. It seems natural to promote turkeys before Thanksgiving, but is it necessary to also promote sweet potatoes and cranberries? In many cases, the shopper buying a turkey will purchase these accompaniments anyway, and gathering real-world consumer data can ensure that short-term events actually drive sustainable growth.

In planning for profitable promotions, retailers also need to gain a forward-looking perspective that estimates the actual lift associated with all the causal factors that impact promotion effectiveness. The entire supply chain must be poised to deliver the right inventory quantities — not just in promoted turkeys, but also in stuffing and gravy. Equally, the supplier and retailer need to maintain an open and shared dialogue enabling nimble collaboration across the various products and categories to satisfy demand at the shelf, optimize inventory policies and align supply with demand within each other’s extended network.

Optimizing inventory investments
Markdown pricing represents a careful balancing act: Retailers want to maximize margins, but need to clear space for the next season’s assortments. The key lies in a lifecycle perspective that considers how consumers respond to different prices at various times.

Retailers can leverage robust forecasting tools to identify merchandise that will not achieve its sell-through goals before demand drops. They can make smaller price reductions early — when natural demand is still there — instead of making deep discounts later. By executing markdown strategies with more accuracy across selling channels, retailers can maximize margins and inventory investments.

By studying the effects of price across the entire lifecycle, retailers can maximize current margins and arrive at truer baseline forecasts for the future. For a given product, 300 units might have sold at the regular price, 400 on promotion, 300 at low-margin markdown prices and 200 below cost. Typical forecasting tools only look at total units sold and forecast based on that number, but a price-sensitive forecasting solution helps retailers rationalize the effects of price and create a more accurate forecast that protects margins.

Understanding the nuances of purchasing behavior, setting prices correctly at every stage based on actual consumer values and basing forecasts on those insights will separate the retail leaders from the followers as consumer markets strengthen.