Today, customers vote with their feet; shoppers have become increasingly channel agnostic and gravitate towards the channel that offers most value—with pricing becoming a game changer. Most often, retailers tend to adopt a ‘reactive’ approach to pricing; playing ‘not to lose’. To survive, it is an imperative that retailers transform this mindset from ‘play not to lose’ to ‘play to win’.
What is Driving the Renewed Pricing Focus?
Modern web-only retailers are presenting lucrative propositions such as free shipping, registered mail, and portal-based discounts for specific customer groups such as students and mothers, and subscription-based supply of daily utilities such as paper towels and diapers with special discounts based on volume and loyalty programs.
The figure demonstrates how various factors have transformed the market as well as customer perspectives, and the shift required in the pricing strategy.
During the 2012 Thanksgiving sale, Amazon.com stunned competition with multiple price changes in a single day. A few players opted out of the competition (mostly because of inefficient processes and lack of technological maturity) and let the others stock out. Yet others tried to match these price changes, thereby straining their in-store workforce, and grappling with time to validate the impact of the price change on their top and bottom line items (revenue from sales of goods and services, and net profit).
Both strategies had their own pitfalls. In the case of the former, planned sales went askew as these retailers were at the mercy of others’ supply capacity. The latter strategy did not have the required analytics to validate changes and their impact; with added limitations on how many times these retailers could execute price changes. Irrespective of the setbacks, Amazon’s 2012 Thanksgiving sale reveals a fact that is difficult to ignore: multichannel retailers face stiff competition from web-only retailers, especially with regards to pricing.
Apart from pricing challenges, retailers have to contend with demanding consumers. Consumers are demanding more for less—more options at a minimum price and top quality service levels irrespective of where they are shopping. The retail market place is becoming increasingly bullish,, with retailers attempting to offer the best price as well as a superior customer experience. With different channels having different operating dynamics, multichannel retailers are struggling to adopt a customer-centric strategy as against the traditional product-centric approach to pricing. As customers grow savvier, retailers need to provide the best in-channel experience while dealing with price inconsistencies and fulfillment issues specific to each channel.
Barriers to Agile Pricing
Online retailers such as Amazon.com invest about 6% of their revenue in technology and innovation to help them stay ahead of competition. Although there is a need for agility, traditional brick and mortar stores are saddled with legacy processes and applications which limit their ability to compete with online stores. Some of the challenges faced by retailers in their pursuit for agility include:
- Maintaining cross-channel consistency: Legacy architecture, ill-equipped Point of Sale (POS) and limited in-store labor bandwidth are potential bottlenecks
- Dealing with competitive landscape: While gathering and analyzing competitive intelligence is a pre-requisite to remaining relevant to the customer, retailers must harness this intelligence to gain meaningful insights
- Limited computing capability of price optimization system: Insufficient computing ability of existing price optimization systems (inability to aggregate, disburse, and analyze information from all existing and emerging sources to facilitate mass experimentation through real time analytics) limit the capability to consume new metrics such as customer elasticity and shipping cost elasticity
- Managing complexity: Insufficient technology to support going beyond key value items and match items across and within channels in the absence of a robust Item Master with rich attributes
- Availability and integrity of data: Inability to use price point history, competitive intelligence data, and procurement data for pricing decisions
- Organizational structure challenges: The silo approach to store and online pricing needs to be replaced with an integrated approach to leverage the unique benefits of each channel
Building Next Gen Pricing Capabilities
While retailers gear up to transform themselves from being product-centric to customer-centric, they should also focus on individual point capabilities that a next generation pricing regime must have. This includes:
- Omni channel price consistency and transparency
- Enhanced competitive intelligence
- Dynamic price changes
- Price localization
- Price personalization
In order to achieve these capabilities, retailers need to first cross other milestones such as an intelligent POS system for intraday refresh, agile shelf labeling, channel specific competitive shopping, and the ability to comprehend and react to channel specific customer price elasticity. Some of these changes can be attained easily while others might require complex execution around multiple systems.
Retailers are grappling with increasing complexity in their business operations due to the onslaught of technology, socio-economic situations, and the global spread of the supply chain. The industry requires pricing systems and end-to-end process transformation in order to lead the change and accommodate:
- Real time reporting and analysis on prices
- Execute real time price changes
- Increase competitive intelligence
- Develop preemptive capabilities
Organizational synergies must be directed towards customer centricity to realize the full potential of the implementation of the point capabilities stated in the complexity benefits graph. Accommodating the new rules of retail necessitates an investment in scalable technology, re-engineering of traditional processes, and strategic realignment.
Published in the TCS Retail Forum Journal – Issue 2 (PDF, 1.8 MB)