THOUGHTS

Retail Pricing: Urgent Action Needed as Cost and Margin Pressures Build 

Feb 7, 2024

Written By: Vishesh Kumar

Factors behind the retail pricing play  

Manufacturing costs have leaped up by more than a third since early 2023 in at least 20 EU states in the wake of 1.5-2% drop in unemployment rates in the eurozone. No doubt, manufacturers on the continent might want to pass along some of these costs to retail customers. Even the 0.2% fall in the unemployment rate in the US towards the fag end of 2023 has already triggered demand for goods and services, and the inevitable consequence: jacked up sticker prices at retailers. Any decrease in the percentage of unemployed people in the labor force almost always results in elevated producer prices. Another culprit behind retail price hikes is, of course, inflation, and importantly, central banks are busy fighting elevated inflation rates in both Europe (6%) and the US (4%) in recent times. Inflation plays out typically in two ways. With inflation shrinking real wages, consumers think twice about splurging at stores, preferring instead to put away dollars in anticipation of hard times. The inflationary blow on businesses results in increased input costs, wages and salaries, as well as the cost of day-to-day operations. To keep margins intact and beat the heat of inflation, companies generally bump up retail prices. In turn, price changes might affect the consumers’ willingness to buy them, though the price tag is not an overriding consideration for retail consumers except in the case of certain product categories.  

Importance of the Retail Pricing

Profitability is key  

Several factors – in addition to the ones detailed above, also collectively contribute to the retail pricing landscape such as tariffs, customs fees, value-added taxes, and regulatory changes. New regulations, like the EU’s Omnibus Directive, for instance, require retailers to be more transparent about price discounts. The gist of it is that to lessen the impact of rising costs and consequent margin pressures, businesses must refocus their energy on setting price points that will ensure healthy profits and repeatable growth for the longer term. Price setting must reconcile seemingly disagreeable interests, and that’s the challenge and beauty of it! On the one hand, products must retail at prices customers find appealing. At the same, prices must be such as would generate healthy profits and volumes for retailers.  

Retail pricing models (must) employ multiple parameters  

Now and in the future, pricing models in retail must consider a range of factors in order to hit the right note in pricing. These measures include the customer’s willingness to pay, market demand, intensity of competition, product or service differentiation, and target market segment. Production costs, profit margins, target revenue, and competitors’ price points are also important considerations in retail pricing. Price setting is not some one-time vaccine! The previously mentioned parameters that shape prices are in a state of continuous change. So, price points need constant recalibration over time to reflect the changing dynamic.  

The future of retail pricing is automation 

Making informed decisions around pricing is not so much of a hassle now that there are several AI/ML based tools on the market. These models sift through humongous amounts of data on retail customers’ likes, motivations, expectations, and price sensitivity as well as competitor prices and other market data to recommend optimal prices in under 48 hours!  

How Infiniti Research can help you

While most present-day businesses are deeply invested in efforts to improve the customer experience, breathing new life into old-world retail pricing strategies is not a priority for many of them. The fact remains that a majority of customers are all for innovative pricing schemes and these tend to find ready acceptance among users. Of course, some sectors, like airlines, ride-sharing services, hotels, and digital media, seem more in the mood for price optimizations compared to other markets. Even so, over the past few years, in our experience, industries that have been less upbeat about strategic retail pricing – such as banks, now find merit in turning this into their core discipline. At Infiniti Research, our experts enable businesses across sectors to establish a significant and noticeable presence in the market. Our specialists can help your business stay up to date with the latest pricing trends in your sector. Request a free proposal to know how experts at Infiniti can help you develop optimal pricing strategies for your business – Now!  

A Central European retail firm connects the dots between price points and profitable customer segments  

Our client is a locally oriented and committed retailer in Central Europe. Convenience retail (i.e., small retailers who stock essentials) is among the most invariable aspects of the region, and our client too has an indomitable focus on a limited selection of basic items that are indispensable for local communities. As for challenges, customers in the region tend to be financially strapped while the retail landscape here is a fragmented one with significant regulatory controls.  

Despite many positives, sluggish revenue growth seems an enduring feature of retail in most of the developed world. Intense competition, including from born-digital e-commerce players and Western European retail majors with considerable marketing muscle means retailers in the region must embrace smarter retail pricing strategies to turbo-charge their revenue streams. Moreover, price tags of certain products did not accurately reflect the customer’s perception of their value. As a result, certain of the offerings were either overpriced or underpriced, and neither scenario was helping the client’s cause! Besides, there was also a need to customize some of the offerings and switch to a simplified pricing mechanism to make them more appealing for the younger crop of customers.  

Retail pricing

Our experts followed a three-phased approach to price analysis and retail pricing for the client. In the first phase, the target market was carved up into various subsegments based on different criteria such as customers’ income, lifestyle, spending habits, and share of customers’ wallet captured by our client. This segmentation study provided the client with a clearer understanding than before of the differentiated needs of each segment. The study also revealed the extent to which various buyer groups were willing to pay for products that met their desires and requirements. In the subsequent phase, our experts laid bare the weaknesses of a few offerings and pointed to product features that needed expeditious enhancements to meet and exceed the expectations of diverse buyer groups. In sum, our industry price analysis enabled the retailer to aggregate similar customers and create promotional campaigns based on specific behaviors and interests of customer groups – such as cashback rewards, for instance, to woo millennials.   

In the past couple of years, a growing number of industry participants have made retail pricing the mainspring of sustainable business growth. Here’s one such success story of how a Central European retailer buffed up its price points to win over profitable customer segments, such as digital natives. The client’s price steering committee and our pricing analysts worked together as one team to uncover the differentiated needs of various customer groups and their willingness to pay at different price points. 

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