How Ai and Data Access are Revolutionizing the Retail Pricing Game
Today's pricing management software analyzes an increasing number of parameters that renders results that are beneficial for many supply chain members: retailers, their suppliers, manufacturers, and consumers.
Soaring energy prices, increasing wheat prices, and dramatic changes in many other household staples signaled the return of inflationary times in the United States and beyond. With inflation rates surpassing 9% by the middle of 2022, it does not take an expert to conclude that pricing, margin, and consumer demand will be critical parameters to watch for the foreseeable future in the retail sector. The disruption of supply chains against the backdrop of a health crisis put pressure on raw materials whose demand was fueled by a robust post pandemic economic recovery in many regions of the world. However, uncertainties about inflation, supply chain, and significant European conflicts are complicating pricing forecasts. Moreover, with the absence of efficient decision-making tools, the problem could become volatile, fueling instability of the economic system and further destabilizing retail supply and profitability. Indeed, the health crisis has disrupted purchasing habits, with people now paying more attention to prices and promotions than in ever before. Even more troubling are reports that many consumers complain that they have difficulty saving after paying for compulsory expenses, namely rent, insurance, and taxes.
Under these conditions, prices and purchasing power are directly correlated. As a result, consumers have virtually no room to maneuver and are increasingly relying on savings and borrowing to sustain a standard of living.
Awareness of climate change has helped popularize the idea of "consuming less to live better." And the recent global health crisis has further accelerated the movement, fueled by the idea, which is not always valid, that local products are better than the ones that come from afar because, in addition to the transport pollution variable, "if we know where and how it's made" we will consider paying a premium. Nonetheless, if people are more willing to consume responsibly following the health crisis, they are much less likely to have the means and continue to favor the cheapest products. As a result, in 2021 and 2022, several large agricultural cooperatives and governments have asked farmers to reduce their organic production due to insufficient consumer demand, or as we see in The Netherlands, completely close down farms to support more aggressive green initiatives.
We also see a boom in second-hand or used product sales driven primarily by economic considerations or product availability more so than straight environmental awareness. It's becoming increasingly evident that in these changing conditions, more than ever, pricing professionals will have to sharpen their pencils to remain competitive.
The Main Steps of an Effective Pricing Strategy
Although variants may exist, pricing strategies can be grouped into four key categories.
The first is to maximize profits. Market share is ignored, and a profit-maximizing price is calculated (or attempted) by applying the formula whereby profit equals the item's unit price multiplied by the number of sales minus costs.
The second solution is the volume policy. Maximize sales while generating profit thanks to a selling price close to the average cost of the product.
The third solution is to opt for maximum margin. Therefore, the most significant difference between sales and purchase price is obtained.
The fourth possible strategy is to take market share from the competition, which requires charging prices as low as possible to wage a price war. This strategy is similar to the volume policy.
In the end, what rests with the pricing team is the action of setting pricing.
Here are four common strategies to set pricing.
The Return of Value
Value often appears as a negligible or neglected variable during many organizational pricing strategy sessions. However, several studies show that taking the exercise serious makes it possible to maximize margin.
Indeed, a value-based pricing business strategy, or "value-based pricing" has its place. Value-based pricing strategy sets a price based on the value perceived by the customer. The consumer obviously plays a central role in this theory.
Only a scientific approach makes it possible to address the value perceived by the consumer and evaluate the part they play in price setting. A brief overview of the different methods currently in use can be found below; from the simplest to the most sophisticated:
The Basic Five Step Approach
It is evident that the crucial first step is often forgotten: you have to start by defining the critical values of a product or service. For this, we can, for example, conduct interviews with our customers to clarify the value they attach to the good or service.
The second step is to evaluate the critical valuation put forward by your clients. How much they are willing to pay, and what is the elasticity of that price.
Step three, review your revenue and margin model accordingly.
The fourth step is to train sellers so that they sell the value of the goods or services and no longer just sell on price. This way, the customer becomes aware of the value and any product differentiation.
And finally, the fifth step may be the most important since it integrates the idea of added value throughout the supply chain, from creation to sale.
With these steps, we are approaching the beginnings of a much more complex pricing method based on consumer behavior and concepts such as ethical pricing.
For example, the concept of ethical prices was first illustrated by Thomas Aquinas in the 13th century when he stated:
"If the price exceeds the value of an item or vice versa, the equality required by justice is missing. Therefore, none of the partners should profit from the exchange at the expense of the others. In other words, an ethical price must not reflect the balance of power in the law of supply and demand."
Schematically speaking, a fair price must be built from two components. On the one hand, a guaranteed minimum price established to cover the costs of sustainable production and to ensure the basic needs of the producer. In this context, some organizations explicitly prohibit certain practices such as child labor or sub-standard working conditions. The other component of the fair pricing model is the development premium designed to provide producer organizations with a basic self-financing and investment capacity, both in terms of research and development and accounting for the cost of production. (Fair Trade Platform – CCTB 2010 ,www.socioeco.org).
Price Formation After Close Surveillance
An economically sustainable price also implies better remuneration across the entire value chain. For example, in France, the government set out to protect farmers' compensation during the negotiation phase between distributors and their suppliers by bringing more transparency to the discussion regarding costs and the required investment to produce the product.
Today, customers are no longer just attentive to price. They judge products and services in a very objective way. Therefore, when basing pricing on value, the merchant or service provider has a growing interest in linking value to sustainable development. As a result, there is increasing emphasis on helping the consumer understand how the price was set, especially if it is based on some ethical standard. For example, when a price increases, the consumer may feel that it has been raised to take advantage of an increase in demand or a supply shortage without any increase in the related costs. They then perceive these new, higher prices as unfair and unethical. In this regard, Uber has become a textbook case. In 2014, during a terrorist attack in Australia, the demand for Uber cars increased exponentially as residents sought to flee the affected area.