The Expert Guide to Retail Pricing
The management and execution of retail pricing are critical to any retail business, as the retail price presented to a shopper is a key deciding factor for most consumers.
In this expert guide, we provide a comprehensive overview of retail pricing and touch on related functional areas. We also address common mistakes and challenges Parker Avery has witnessed through many client pricing projects. Further, we explore best practices and innovations that can help improve this critical retail capability.
What is the retail pricing process?
When we discuss retail pricing, we are talking about the capabilities to manage prices actively and effectively as part of a retailer’s buying, merchandising, and planning processes. This includes pricing strategy, business processes that manage pricing throughout a product’s lifecycle, execution at the store level, as well as systems that support pricing. Pricing also includes capabilities to actively manage markdowns to optimize margins and drive bottom-line performance.
What is a retail price?
A retail price is the dollar amount at which retailers are selling a product to end consumers. Different types of retail prices include:
- Regular pricing (permanent or every day)
- Promotional pricing (temporary)
- Markdown pricing
- Clearance pricing
High-Level Retail Pricing Process
Define Pricing Strategy
Create/Update Item
Run Price Optimization
Approve Pricing
Execute Pricing
Measure Pricing Effectiveness
Planning and measurement activities
Management and execution activities
Retail Pricing Strategy and Planning
A retailer’s overall pricing strategy is part of its merchandising process and establishes the pricing levels for items at each phase of the product lifecycle. The pricing strategy can include setting price breaks, developing simple good, better, best pricing tactics, or developing sophisticated revenue optimization models. Pricing strategy includes promotional pricing and markdown cadence, and it drives buying decisions. When executed well, pricing strategy also must be seamlessly tied to a retailer’s assortment and item planning processes.
There are many considerations when defining a retail pricing strategy:
- Brand alignment: How should our pricing align with our value proposition, buyer persona wants and desires, brand perception, and product assortment perception?
- Coordination: How complex and time-consuming is it to deploy the pricing strategy?
- Regional differences: How to handle different selling seasons in different geographic areas?
- Informed customers: How to meet increased customer expectations due to the high availability of product information?
- Competitive prices: How to reduce the role of price in purchasing decisions by generating customer loyalty?
- Product scarcity and demand drivers: How do supply and demand impact pricing for that category?
- Impact of social media: What role does social media play in product promotion? And is the brand actively engaging in social selling?
Retail Pricing Management
It is important for retailers to have a basic price management foundation, driven by their pricing strategy. This includes how price management is integrated across the business from merchandising to marketing to demand planning to vendor management. Price management also extends to defining common pricing rules and establishing a stable price management environment for your business.
Regular pricing is typically determined when an item is first introduced into a retailer’s assortment, and it is either based on a margin target (as directed in the merchandise financial planning process) or may be dictated by the vendor (supplier) of that product. As an example, brands like Nike require retailers to initially use their manufacturer’s suggested retail price (MSRP) to ensure pricing consistency across different retail partners and channels. Regular pricing is also sometimes determined by examining historical prices and the performance of similar products. Retailer private label items use the margin-based approach, while still being priced below branded products.
Other factors to consider when establishing retail prices include:
- Vendor funding
- Item costs
- Optimization objectives
- Product life cycle
- Seasonality
- Promotional strategy
- Product/category role
For items in a line extension (for example, adding a new color or flavor to an existing line of products) the existing product pricing is used, despite any incremental costs associated with the new variety. Typically, retailers avoid different pricing for basic line extensions to reduce complexity with in-store price execution, as well as to mitigate customer confusion. The same consideration is taken with sizes of the same item – retailers do not want to discourage customers from buying XS or XXL products.
Price management results in the creation of a price file that gets sent to transactional systems, such as the store point of sale (POS) and digital commerce systems. The price files indicate specific pricing for all stores or geographies for all the retailer’s items during explicit time periods.
Retail Pricing Execution
Price execution means communicating price changes to the point of sale (POS) and other transactional systems, such as digital selling platforms. It also includes the physical store tasks necessary to change prices on tickets and promotional displays. One of the biggest customer frustrations is that they see one price or discount on a display, but a different price is displayed when they get to the register (especially if it is higher). Sometimes, this is not the fault of the stores, as they cannot completely control customers moving products (or even signage) around a store.
Another consideration is store labor. Too many price changes sent to a store impacts the efficiencies of store associates, as they would be devoting time to changing tickets, labels, and other signage rather than assisting customers.
In order to be more efficient in price changes, many retailers are employing electronic shelf labels (ESLs), which is a digital display where prices are pushed to a store with little or no associate intervention required (we dive more on ESLs later in this expert guide). The best practice is to perform this process overnight, as dynamic pricing could be confusing to customers and impact their satisfaction (if prices are increased).
Retail Pricing Measurement
Pricing effectiveness measurement is a key aspect of the retail pricing process, as it allows retailers to determine if their pricing strategies are working and to make adjustments as needed.
Once the price changes are activated at store locations and websites, it is important to track changes to key performance indicators (e.g., revenue, margin, market share) and assess if these changes are in line with the expectations.
In the case actual performance deviates from the expected changes, retailers should inspect the merch/location hierarchy to identify stores/products driving the deviation and pinpoint specific price change culprits. These learnings should then be compiled and taken into account for the next iteration of price strategy updates.
There are several ways retailers can measure the effectiveness of executed price changes:
- Price optimization solutions can help retailers measure pricing effectiveness by assessing the impact of price changes on revenue and margin. These solutions can also provide price elasticity analysis to help determine the optimal price points for items based on customer sensitivity to price changes.
- Internal reporting capabilities can also be utilized to track how key performance metrics changed post-execution of the price changes.
- Insights into market share or share of wallet trends are available from third-party providers.
- Customer surveys allow retailers to gather feedback from their customers on pricing, including whether they perceive the prices as fair and how pricing affects purchasing decisions.
What systems support retail pricing?
Typically, retail pricing is supported by a single system with many integrations to related systems, such as point-of-sale, e-commerce, ESL, and others. Regular pricing systems help a retailer determine the dollar amount at which products will be sold to the consumer. Often retail pricing is handled in the core merchandising system during initial item setup and ongoing item maintenance.
Pricing technology can include ancillary systems or modules such as analytics-driven price optimization and markdown optimization (MDO) systems. These optimization tools are not traditionally included in a base pricing or core merchandising application.
What retail pricing capabilities are the most important?
- Price Prioritization Logic
Retailers must understand the pricing strategies they intend to employ and ensure that supporting systems have the capability to manage those strategies across dates—including handling overlapping promotional dates. Pricing systems must have the capability to determine the best price to present to the customer based on predefined rules and logic in the system.
Conflict Management Efficiency
Understanding the efficiency and effectiveness of the conflict management component of the pricing engine is critical. In large retailers with hundreds of thousands of SKUs—down to the style, color, size, and location levels—the conflict management engine needs the ability to efficiently process that data to present the proper prices at those very detailed levels. When evaluating pricing system functionality, retailers need to deeply understand how many prices they can load per hour, minute, and even second so they can publish price changes to the transactional systems (stores, online) in an efficient and effective manner. This efficiency capability also has implications for printed promotional media.
- Marketing Event Codes
The ability to tag marketing event codes (such as holiday, one-day, and closeout sales events) to items within the pricing system, including start and end dates, creates efficiencies. Further, tagging pricing to marketing campaigns helps with analyzing their effectiveness, understanding the return on ad spend, and planning future promotional events.
- Coupon Management
Coupons represent a type of promotion. The difference is the coupon’s setup, generation, and management—meaning any codes, scannable elements, or printed materials. Often, coupons are managed in a separate application, however, more pricing vendors are incorporating coupon functionality into their systems. Because coupons should be included in conflict management logic and are sometimes aligned with marketing events, they must be either included in the pricing system or seamlessly integrated to handle and analyze a retailer’s promotions effectively and holistically.
Inclusion vs. Exclusion
Pricing systems must be able to handle excluding specific items in a retailer’s assortment from a promotion. This exclusion or inclusion feature should be down to the individual SKU level. As an example, for brand or category-level promotions, some SKUs may be excluded to preserve a margin objective or vendor agreement.
Regulatory Compliance
In addition, with the ubiquity of social media and email marketing, combined with advances in customer intelligence, the sheer volume of promotion in retail has escalated dramatically. This increased frequency of discounts and desire to communicate savings to customers has made it harder to comply with the tangle of laws that govern fair advertising practices. Nevertheless, it is important for retail decision makers to have an understanding of the legal implications of promotional pricing as well as guardrails they should apply to pricing strategies relative to promotions. Most leading price optimization systems allow the configuration of rules to address regional pricing regulations.
Clean Master Data
Proper master data management is critical to the execution of successful pricing strategies and leveraging functionality built into modern pricing systems. Item attributes and data structures must be cleaned and maintained, and data governance must be in place to avoid some of the challenges retailers frequently encounter with pricing discrepancies and reporting.
What common mistakes or challenges exist?
While having a pricing strategy is a best practice, some retailers make it too complex. Pricing strategy complexity not only creates customer confusion but also puts immense pressure on stores to understand and execute the price changes. An example is a common department store price strategy, using color-coded dots that stand for different discount amounts and sometimes correspond to the days of the week. Adding to this complexity is the inclusion of different customer demographics, such as senior citizens, Veterans, or law enforcement, who may receive an added discount on a certain day of the month. While customers typically love a bargain (or the perception they are getting great value), too much complexity can dislodge trust and loyalty. It is important to have a simple strategy that customers can understand, your systems can handle, and that does not place unnecessary burdens on your store staff.
There are sometimes functional disconnects between a retailer’s pricing application and the transactional systems, where one has more flexibility to manage varying price scenarios and details than the other can handle. Retailers must understand the connection between their pricing strategies and what the systems are capable of handling. As an example, we have seen clients who have a robust POS that can manage a variety of price scenarios, but they have an antiquated pricing or core merchandising system that cannot handle the same breadth of pricing options.
On the flip side, some retailers have set up complex pricing strategies in their core merchandising system, but the POS or other transaction systems cannot handle it. To combat this issue, some retailers will design ‘creative’ workarounds to ring up the products to reflect the correct price. While this may seem good for customer satisfaction and sales, the problem is that it creates confusion and errors in the transactional detail for reporting. In these cases, pricing and promotional effectiveness analyses are severely compromised because the data is based on the workarounds employed, as opposed to clean item pricing and sales volume data.
Further, dichotomies between price management and transactional systems open internal and external shrink issues if the store associates are finding creative ways to alter pricing. These workarounds also negatively impact margin.
The operational capabilities of store associates and management to manage pricing activities, alongside many other operational tasks—and in a labor-scarce environment—is daunting. Store staff must receive and then distribute shelf tags and other promotional signage in a timely manner to coincide with systemic price changes. Some retailers still use red pens or color-coded stickers to indicate markdowns and clearance pricing on individual items. These are all highly manual-intensive and error-prone tasks. When retailers develop their pricing strategies, they must think all the way through to store execution what will be the fully-loaded cost and implications of each pricing change—and realistically if the store staff can even handle it. In many retailers, we have seen boxes of promotional and price-related signage that never make it to the sales floor due to a lack of time and/or proper communication.
The frequency of price updates to a retailer’s store transactional systems is critical to avoid costly margin mistakes and manual price overrides. Retailers who can send pricing changes more frequently—ideally instantly—will be able to mitigate these discrepancies.
It is important to be able to include pricing detail in the transaction-level data that is communicated to downstream systems, such as sales audit.
Final Word
Consumers are not only demanding competitive pricing from retailers, but they also want transparency and easy understanding of pricing across a retailer’s assortment, down to the SKU level. Successful retailers ensure prices seamlessly follow customers throughout their shopping journeys and are consistent everywhere they touch the brand. Further, an effective pricing strategy, coupled with flawless execution can build brand loyalty and increase market share. A thoughtful approach to pricing will maintain planned margins and guarantee the right pricing information reaches customers without compromising the stores’ ability the execute price changes.
Contributors
The Parker Avery Group is a leading retail and consumer goods consulting firm that transforms organizations and optimizes operational execution through development of competitive strategies, business process design, deep analytics expertise, change management leadership, and implementation of solutions that enable key capabilities.
