Decision Support

‘Tis the Season for Price Optimization

Team MakerSights

September 8, 2022

Ready or not, we’re quickly approaching “the most wonderful time of the year.” Consumers wait with bated breath to snag the season’s hottest items at special holiday prices, while brands brace themselves to generate an average 20% of annual sales in just a few short weeks. At least, that’s what normally happens.

But the last two and a half years have been anything but normal, and the 2022 holiday season is shaping up to be just as “unprecedented.” Production costs have ballooned due to recent record-high inflation. Meanwhile, consumers’ disposable income has been hit hard by increased prices at the pump and the fear that a global recession may still be in the cards.

“The demand levels are entirely unpredictable. Consumer behavior is unpredictable,” says John McQuiston, managing director and global head of originations, receivables, and trade finance with Wells Fargo. “This is a bit of a crystal ball Christmas.”

So much uncertainty is putting intense pressure on retailers to rethink their usual pricing strategies for Black Friday and beyond, especially as they struggle to move through current inventory and make room for holiday goods. 

The Ghosts of Holiday Shopping Past and Future

Supply chain shortages drove increased demand last holiday season, making it possible for brands to pass rising production and shipping costs to consumers by cutting back on the usual Black Friday and Cyber Monday deals. This combined with multiple economic stimulus packages, record job growth, and growing inflation drove 14.1% year-over-year sales growth.

This year, however, brands are sitting on a glut of unwanted inventory leftover from shortage-panic orders. Economists are estimating less than 3% global GDP growth. And 50% of employers now expect job cuts within the next 6-12 months. 

The result? A recent survey of 3,200 Americans ages 18+ shows that:

  • 46% are purchasing more products on sale
  • 44% are buying from generic or less expensive brands
  • 60% are planning to ramp up “bargain hunting” in the coming months

While many brands take economic downturns as a sign to indiscriminately decrease prices to appeal to price-sensitive consumers and maintain revenue forecasts, seasoned retailers disagree. “Brands need to be careful not to chase their plans with excessive promotions,” cautions Brian O’Malley, Managing Partner at Forerunner Ventures

“First off, this has a negative brand impact. Second, it can train customers to buy on discount, which can permanently damage margins. And third, it can attract a clientele that won’t be as sticky as existing customers. It’s better to take the plan and cost structure down a bit than do unnatural things to preserve a revenue number,” he says.

How can brands balance the needs to cover rising costs, meet consumers’ needs, protect profit margins, and maintain brand integrity — all while remaining competitive? Successfully navigating such swift and sweeping changes requires retailers to take a much more nuanced and data-informed approach to pricing this holiday season.

Giving Brands a Reason Not to Pout

As McKinsey points out, “When it comes to pricing, a prerequisite of any action is to understand your consumer and identify which items are key value items (KVIs).” Also referred to as “known value items,” these are the small number of higher-commodity products that consumers tend to compare most across brands and that have the biggest impact on their price value perception of a brand as a whole. 

Retail veteran and former General Manager of Stitch Fix Women Lisa Bougie agrees: “There may be a case for repricing on commodity products that are competitive and aren’t backed by innovation and uniqueness. However, if you are a premium brand that solves customer pain in ways that are truly differentiated, this might not be the right path. You need to preserve the advantage of those distinctions. What is your distinct advantage? Customers will pay for that, even in a recession.”

To help adjust prices across assortments without negatively impacting their brand image, upsetting consumers, or pricing themselves out of the market, leading brands are utilizing price optimization testing. This exercise allows them to understand how the demand for a product shifts as the price changes, effectively pinpointing KVIs versus differentiated items, as well as the “sweet spot” between margin and demand for both.

Unfortunately, it’s not quite as simple as asking consumers how much they’re willing to pay for an item. Testing involves considering several factors — like competitor pricing, sales history, market share, and market conditions — and using conjoint analysis to indirectly measure price sensitivity in a way that mimics a consumer’s real-life shopping experience.

MakerSights Price Testing

This approach also gives brands the opportunity to further optimize holiday pricing through personalized promotions. As retail industry sales expert Jonathan Treiber shared in a recent Forbes article, “A customer who needs a 25% discount to buy won’t buy when only given 10% off. But the inverse is also true: a customer who would buy at 10% will still buy at 25% off. This disparity needs to be taken into account when determining pricing strategies.”

Pay close attention to consumer profiles and strategically test prices across target segments to learn which items and product features different consumers value most. Then tailor discounts accordingly, rather than slashing prices indiscriminately or missing out on new or niche audiences. For example, a consumer living in Chicago is more likely to pay a premium for a high-quality winter coat than someone living in Phoenix. 

A personalized promotional strategy not only benefits brands in the short term, but also has a positive long-term effect. Research shows that 76% of consumers are more likely to make initial purchases and 78% of consumers are more likely to make repeat purchases from brands that personalize their experience. 

Optimized Pricing Is Coming to Town

There is still reason to be optimistic though. Early data gathered by Customer Growth Partners is showing that back-to-school shopping exceeded expectations. The consulting and research firm forecasted 5.5% year-over-year growth for back-to-school spending, but it came in a full point higher at 6.5%. 

Clearly, consumers are still spending, just not nearly as much as last year when year-over-year growth clocked a jaw-dropping 13%. While the delta between those two figures is vast, much of that increase can be attributed to the fact that the majority of students in the United States (and abroad) spent much of the previous school year learning remotely and backpacks, notebooks, and even clothing weren’t as necessary. Then, in 2021, many families had to buy more supplies than the previous year in anticipation of finally returning to the classroom.

Back-to-school shopping has long been thought to be a bellwether for the holiday season ahead. Let’s all hope it is and that the 2022 holiday shopping season also exceeds its forecast. 

Rather than wait for a Christmas miracle, though, brands must proactively address any remaining excess inventory that must be sold, sent to off-price retailers, or, if seasonless, stored in warehouses for 2023 so they can clear the shelves for holiday merchandise and a profitable Q4. 

Brands must also approach pricing from a much more strategic, data-informed position on pricing or risk falling into a similar knee-jerk, panic-driven decision trap that led them to the inventory glut pickle many now find themselves in. Just like the brands and retailers that took early, albeit painful, action to move inventory earlier in the year, those that address pricing proactively now will be the ones smiling in January earnings calls. 

Interested in learning more about pricing analytics? Read about MakerSights’ price optimization and value-based pricing capabilities.

Team MakerSights

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