Consumer prices increased by 5.4% last June compared to the year before. Inflation is rising with high speed and challenging times for retailers and brands are present. The uncertain economic environment and rising purchase prices seem to have paired up with some inconvenient occurrences, such as the blocked Suez Canal or the current chip shortages. Whether your company directly faces pricing challenges due to supply shortage, logistical constraints, or limited production, almost all organizations face the same challenge nowadays: how do we protect our margins with cost prices increasing without harming our customer relationships and their price perception?
These times request a different pricing approach and adjustments in your pricing strategy. How and when to tackle margin erosions, still drive profitable growth and take strategic control over this new situation requires a thorough understanding and monitoring of the market besides a critical viewpoint on your own internal strengths and weaknesses. To guide you through this period and even transform the challenge into an opportunity for the future, Omnia is here to help. In this article we will discuss and we will guide you through some steps you can take and potential pricing tactics you could apply.
How to approach this challenging situation?
Rising purchase prices can either be passed on to consumers, it will get absorbed elsewhere in the supply chain or it might result in margin erosion. When there is no other option than to increase the prices of your offerings to your consumers you need to consider the right approach. Questions such as “how to time price increases” and “for which assortment group should prices be increased first” will have to be answered in advance.
To guide you through this process, there are a few steps that you could consider:
1. Don’t lose eye on your value proposition, mission, and vision statement. This will guide you to the right decision on your timing (follower versus leader) and pricing position.
2. Monitor the market and the pricing moves of your main competitors/resellers. In these times of inflation, taking the role of a follower might be your strategic move. However, fast response is essential to both maintain your ideal price position as well as not losing margins over extended periods of time.
3. When you need to increase prices of your offerings to stop margin erosion you need to take a close look at your pricing and sales data and divide your assortment into different groups. In this way your organization could make a well thought-through pricing decision per product group:
a. Demand-based: Elastic products versus inelastic products and heterogeneity of products for different customer groups
b. Supply-based: Products that you simply cannot deliver, or stock is running out
c. Product-based: Products with value-added services
4. Define clear and quantifiable objectives for each product group and think about alternative strategic plans when price increases do not work out intendedly.
5. Adjust your communication and marketing efforts to your ‘new’ pricing strategy.
6. Keep monitoring the market again and again and be able to adjust your pricing flexibly and dynamically.
How to divide your assortment and determine your pricing strategy per product group
When step three needs to be taken and your assortment is divided in several groups, you can start the pricing strategy implementation in Omnia. Below the three approaches and its pricing implications are described in more detail.
Demand-based: Value-based pricing and elastic products versus inelastic products
Due to government’s relief packages and the savings of most households during the Covid-pandemic, pent-up demand can be noticed nowadays, and strong consumerism is shown after a period of decreased spending. This increase in demand contributes even more to the current price inflations.
Especially when increasing consumer prices, it is incredibly important to take elasticity levels per category or product group into account. Elasticities can be used to make predictions on sales results after a price change. With increasing cost prices and the need to increase consumer prices to prevent margin erosion, it is useful to monitor those elasticity buckets closely to determine its effect on sales. This will help your organization to considerably increase prices for the right product groups without risking unexpected drops in demand.
As part of Dynamic Pricing, Omnia’s elasticity algorithm can calculate elasticities on a category level. This will provide you with the most recent insights into the elasticity-levels of your assortment. In your pricing strategy you can adjust price setting towards those elasticities and increase prices of the less elastic or inelastic categories first.
Supply-based: Products that you simply cannot deliver, or stock is running out
Logistical shipment challenges and global labour and materials shortages result besides increasing manufacturing costs in limited stock levels. Many organizations face delivery problems and need to tell their customers more often that a product is not available.
First, the increased manufacturing costs requires a shift to being more cost-plus focused when setting your price. Your pricing strategy requires price tactics that protect your margins or reach predefined markup targets. With Omnia’s limit actions it is possible to integrate margin and mark-up requirements and automate your pricing strategy so that marginal targets are always reached.
Please be aware of the different implementation needs of mark-up target versus margin target. Markup can simply be implemented as a certain percentage on top of your purchase price whilst margin needs to be calculated as a percentage of your selling price.
Furthermore, with the implementation of a stock-based strategy, your organization can automate alignment between supply and demand based on real-time inventory data. Price advice can therefore be dynamically adjusted to market dynamics and your own internal stock-constraints. A low stock level might result in a higher price to protect yourselves against having to sell ‘no’ to customers. On the other hand, pricing might be used as an asset to control limited stock levels at this moment in time to stabilize deliveries until peak periods such as Black Friday.
All stock-related data points can be used to set your pricing rules upon, from days of sales inventory to amount in stock. Especially when reorders are hard and it takes a long time to restock, you don’t want to run out of popular products, whilst your competitors do have them available still.
Product-based: Products with value-added services
Preservation of trust and loyalty of your customers is often at risk with significant price increases. A series of pricing adjustments might awaken your customers and steer them into using price comparison websites again to make the trade-off where they want to buy instead of buying it directly from you. Therefore, careful measures are needed, and pricing decisions made on product-based features might be helpful.
When facing the need to increase prices to prevent margin erosion, a third way to decide upon your pricing tactics is to determine cross-sell opportunities and bundle popular products with value-adding long-tail assortment or value-adding services. In this way, you balance out margin gains across your assortment without risking too much harm to your customer price perceptions for popular or your best-selling products.
With a High-runner strategy you are able to determine the best-selling products by means of real-time sales data and product popularity variables, such as unique product pageviews. Omnia’s reporting options in combination with the Google Analytics API, offer you the opportunity to get insights into your popular products versus your long-tail assortment. When setting your pricing strategies upon those different groups, it is best to first increase margin on your long-tail products that are bundled up with your high-runners.
Finally, it might be useful to already think ahead and start planning your future pricing tactics when all the dust is settled in the future and inflation is back to normal. Is it going to be your aim to restore prices to the level they were before or does this era provide an opportunity in the future to increase profitability and compete on another level for some categories?
In these challenging but interesting times, feel free to reach out to your customer success manager to discuss the possibilities to optimally let Omnia work for you.