Combating a Volatile Macroeconomic Climate with Retail Price Optimization
How should retailers and consumer brands make heads or tails of the current economic landscape? It used to be relatively straightforward. There was a concept of “reliable macroeconomic indicators” such as the inversion of the yield curve, unemployment, consumer sentiment, industrial output, and other factors that provided a solid understanding of the economic situation. These indicators, for the most part, worked in unison.
However, in the current climate, not only are we seeing contradicting indicators of economic health, but the variability associated with indicators such as consumer sentiment is unprecedented. Gas prices and other factors that drive the cost of goods sold are equally volatile. Retail inventories are jumping from dangerously low to unmanageably high, and labor woes are not helping either situation. Adding in the effects of inflation and the lingering aftermaths of COVID, projecting demand has become increasingly more difficult. Too many retailers are reacting to erratic inventory levels with traditional pricing methodologies while attempting to salvage margins.
Further, the changing landscape means that consumer responses to price changes are also becoming more volatile. Yet pricing is often the most effective way to deal with excess inventory, as well as capture additional margin. The combination of these factors makes it essential for retailers to understand price elasticity across their entire assortment.
It’s time for a better approach to retail pricing.
Retail pricing decisions must be much more dynamic than historically performed. Retailers need to continuously monitor, model, and update their understanding of the consumer price response to avoid making decisions on erroneous information. This oftentimes requires running continuous price scenarios across channels and product lines—in other words, price optimization.
The combination of these factors makes it essential for retailers to understand price elasticity across their entire assortment.
When done well, the return on investment for price optimization solutions can be massive. In several Parker Avery price optimization client projects, we have seen double-digit improvements in earnings due to inventory savings, increased sales, and improved margins.
The opportunities associated with an updated price optimization process and supporting technology are truly the silver lining to the woes of the current macroeconomic climate. Further, there are different ways to implement these solutions, depending on the maturity of the company’s pricing organization and the sophistication of existing technology.
If you would like to start a conversation about how to get started on price optimization, we would love to chat.
