In what’s another sign of growing shopper resistance to high prices, in a recent Prosper Insights & Analytics survey, 41 percent of consumers said they are shopping for sales more often and 30 percent said they are doing more comparative shopping online.
Those findings show that retailers need to be extra careful with their pricing strategies to maintain customer loyalty while preserving profit margins. According to Matthew Pavich, senior director of strategy and innovation at Revionics, a company that develops retail price optimization software, finding the right price has always been an art. But now, more than ever, finding the right price also requires science.
“Price too high, and you lose the trust of consumers,” said Pavich. “Price too low, and you’re putting your business’s performance at risk. In this complex environment, retailers need to apply artificial intelligence (AI) to inform their pricing decisions. Because of the way AI functions, it can drive better value up until the item is cleared off the shelf.”
Having the optimal shelf price is more critical than ever given shoppers’ budget-conscious mindset. Consumers are pinching pennies in a prolonged inflationary environment as they contend with rising credit card debt and the return of student loan payments.
But even in more normal economic times, setting the optimal price point is difficult because of the complexity that’s involved. That’s especially true in categories like produce, meat, and seafood. What makes pricing there such a challenge is the number of factors such as freshness, seasonal spikes, lower margins, and weighting.
Another product category that’s hard to price is trendy electronics. The market debut of a hyped electronics product generally causes a massive spike in demand only to be followed by a rapid demand drop a few weeks later.
Newly introduced products are also difficult to price optimally because of the limited sales history. “A sports analogy for this is the batting average of a rookie player,” said Pavich. “If that player has a batting average of .300 at the start of the season, performance is harder to forecast than if the player is batting .300 at the end of the season.”
And when more than one factor is influencing demand for an item, it’s extremely difficult to know which factor is actually driving the impact.
“A lot of factors – such as seasonality, inflation, inventory shortages, competitive shifts, etc. – can influence demand,” said Pavich. “Being able to determine which factors cause those shifts and, more importantly, knowing how to react to those nuances require retailers to use sophisticated pricing science.”
Misguided promotions also plague retailers’ pricing strategies. There are typically three major pitfalls when it comes to promotions. The first is retailers doing the same promo as in the prior year. Past effectiveness in promotions can’t be counted on because the retail landscape is constantly shifting.
Second, many promotions are vendor initiated and often end up driving better results for the vendor than for the retailer. Finally, the biggest contributor to ineffective promotions is the lack of sophisticated analytics being used. Retailers need the right tools to understand and visualize the holistic impact of promotions.
At first glance, a lot of promotions may even appear to be successful because total revenue increased or there was a lift in unit sales. But Pavich cautions these same promotions may actually be suboptimal once you factor in how the incentives cannibalized sales on other products or drove consumers to stock up at lower margins.
“Using AI-powered pricing software lets retailers address those challenges by analyzing data from multiple sources to provide prescriptive decision-making on setting price points,” Pavich said. “Retailers need to focus on optimization across the full product lifecycle, inclusive of base pricing, promotions, and markdowns.”
Given all those benefits, it’s no surprise that the 2024 Retail CFO Outlook Survey found that 46 percent of retailers are already using AI to optimize prices. The use of AI pricing technology enables retailers to make intelligent pricing decisions that are more closely aligned with the product’s true market value. “This software offers better, fairer, and more value-driven prices to consumers,” said Pavich.
AI pricing technology gives retailers crucial insights into buyer behavior and market dynamics so they can fully understand all the factors that go into setting the optimal price point for a product. “At the core of a great price optimization solution is understanding what consumers want and how they will react to pricing moves,” said Pavich.
One common misconception is that AI pricing solutions are mostly profit focused at the expense of consumers. “The truth is that most retailers leveraging science-backed solutions are more focused on the competitive advantages that AI provides,” said Pavich. “It gives them the ability to offer lower, more enticing prices to consumers on the right products.”
