With a two-digit inflation rate persisting in the last few months and its long-term outlook remaining high, consumers are changing their habits. It is obvious that shoppers are becoming more aware of prices they pay, and that they are moving towards cheaper, lower-quality products or even postpone their spending. The group of price-sensitive customers is growing. How to guide the pricing teams to understand consumer behaviour and help them to steer pricing tactics in uncertain times?
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Fast-changing markets: the challenges of modern pricing in retail and e-commerce
Online | 25th October 2022
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Top priority: Understanding the relationship between a price change and sales
Changes in consumer behaviour create opportunities and challenges for businesses when setting up their pricing tactics. Pricing managers must diligently monitor inputs, competition, and consumer behavior and adjust prices accordingly. Evaluating the pricing on a monthly or quarterly basis is insufficient as is category-wide price nudging. The question is how to navigate within these burning topics?
Understanding the relationship between a price change and sales should be among the top priorities. Such a relationship can be measured via the price elasticity of demand:
Even though it might look difficult, companies can identify this relationship with proper data and use it to their advantage with appropriate technologies. Based on the historical sales data, companies can identify the products which are price sensitive, i.e., price changes have a major impact on sales, and companies should use this knowledge to maximise their profits on those products. Similarly, identifying and choosing a good price strategy for essential in-elastic products that shoppers tend to buy irrespectively of their price can drive volumes and increase customer loyalty.
Not only the price elasticity but also the impact of other factors on sales is crucial
Price elasticity of demand should be the first step for the pricing teams to understand how their tactics affect sales. Such a relationship assumes that the quantity sold is driven solely by the price. We know, however, that there is much more to consider when deciding to purchase a product or a service. It would be reasonable to expand the analysis and include factors such as the weather, seasonality, promotions, etc. The various relative impact of such factors on the shoppers’ decisions makes this issue even more complex.
Knowing the relationships between sales and price (and possibly other factors) allows sales teams to derive important insights. How many units or services will I sell for a given price? What will be the impact on my sales if I increase the price by 5%? In our practice, understanding the price elasticity and the impact of other factors on sales is crucial in searching for the optimal price. Considering the high inflation and customer loyalty at stake, it also provides pricing teams with informed decisions about building the right pricing mix for their portfolio. To achieve the desired KPIs, the mix should be built around the price adjustments of the prices for sensitive and in-sensitive products. Such a tactic might facilitate compromises on the business margins while providing customers with vital options to buy the necessary products.
“Hard times reveal good friends” and so, companies should not compromise their long-term relationships with customers for short-term goals. With proper knowledge and tools, businesses can take steps to avoid this compromise. Get to know more about modern pricing strategies and tools in our webinar on modern pricing.