With so much happening on the economic front in the last nine months, from supply chain issues to an economic recovery, nothing hits home harder than the rampant inflation we are experiencing. While wages continue to increase, they are not moving fast enough to compensate for inflation numbers that hit 7.5% in January of this year.
What’s more, retailers are caught in the middle of the inflation rise; they are trying to stabilize prices while at the same time manage profits and keep customers coming into their stores.
I asked Pini Mandel, CEO and cofounder of Quicklizard, to offer his expertise on how retailers should cope with this issue. An ambitious entrepreneur since 2006, Mandel has founded three companies throughout his career. Quicklizard was established in 2010 after he grew frustrated with the repetitive, manual processes that prop up in the retail industry. Quicklizard makes use of all the data it has access to, so customers have a comprehensive understanding of the markets they are targeting.
JG: Pini, can you give us your perspective on this inflation rise?
PM: The past several years have been a tumultuous time for retailers. Store closures driven by the Covid-19 pandemic as well as the acceleration of the adaptation of digital commerce throughout the U.S. have caused retailers both time and resources.
Now, retailers will have to battle rising inflation and shortages in the global supply chain. However, there is a way for retailers to alleviate the pressures these new challenges bring. An efficient dynamic pricing strategy can allow retailers to navigate these issues as well as ensure no more of their valuable time and resources go to waste.
We haven’t seen this rise in inflation in more than 40 years. What’s going on?
Inflation is a typical economic occurrence. That said, what is currently happening across the U.S. is anything but ordinary. The annual inflation rate in the U.S. accelerated to 7% in the last month of 2021, a record high since June 1982. Moreover, this is more than three times what policymakers say is acceptable (2%).
There also exist many factors that can, and are, currently exacerbating the risk of a high, sustained rate of interest, such as:
- Increase in interest rates (i.e., the high cost of borrowing)
- Challenges in predicting and managing money flow
- High cost of goods (COG) that can impact inventory replenishment
- Difficulty in forecasting demand and predicting consumer behaviors
To endure the current period of heightened inflation, retailers should adjust their prices accordingly to ensure they are covering the costs of goods and operational expenses while simultaneously responding to the competitive landscape and meeting customer expectations.
How can retailers protect themselves from this rise in inflation?
Where retailers fall short is raising their prices using simple rules as a one-time response to a cost increase; for example, increasing X percent across the board or maintaining existing profits. However, this approach does not consider customers who are price-sensitive and feel the effects of inflation. Notably, these across-the-board price increases rarely lead to optimal outcomes that balance customer demands and profitability.
A dynamic pricing strategy is centered around deliberate pricing by channel and customer to maximize value perception as well as achieve business objectives that include optimizing profits or maintaining a robust cash flow. Ultimately, when done correctly, it can also ensure an increase in customer engagement and loyalty.
Retailers should consider these pricing strategies to minimize the negative effects of inflation while strategically increasing profits and market shares.
What about the rise in costs that retailers are experiencing?
The process to adjust costs to inflation begins with calculating the inflation rate for each product in the assortment based on historical price changes from the past year; then adjusting cost by accounting for future price increases.
Retailers need to create a forecasting model to address all the variables that affect costs in the next three to six months. Calculated costs are then applied to the current strategy to determine the margin and set the new price for each item.
The challenge comes when a retailer is accounting for every variable that will impact every item in their inventory. This task is humanly impossible, no matter what resources there are at hand.
For these reasons, more retailers are relying on AI-driven predictive analytics to ensure they can leverage this historical data from either identical or similar items to predict demand for products and product groups. The next step is combining the insights from business rules and pricing algorithms to ensure the maximum yield.
Should they react to what their competitors are doing?
It is important that retailers follow their competitors closely; they should take note of any price increases and consider following their lead. There are numerous aspects that exist in the marketplace to consider. Moreover, it is important to implement competitive data to gauge the market through price changes.
That said, a retailer should not keep its prices low to gain an advantage over its competitors. This strategy has the potential for a negative impact. For example, low pricing may convey the message that products aren’t as high quality as a competitor. This could ultimately impact brand image.
Significantly, retailers should also be conscious that reducing prices to try and sell more won’t necessarily mean an increase in profits. This is notable during periods of high inflation.
To leverage this strategy successfully, retailers need to identify the competitors whose pricing is affecting their business. This may not always be obvious.
What about dropping certain low-margin products during these times?
Uncertain times are confusing for many consumers; many shoppers make decisions based on how they perceive a brand compared to the competition. Such perception is often built on a few key products.
Retailers must identify items in their product mix that will drive value perception. They should keep the price of KVIs [key value item] steady, or even decrease them to attract customers. Then, increase the prices of products with lower price elasticity.
This approach helps create a win-win situation in which customers aren’t paying more for items. And the retailer wins on price perception while maintaining wallet share and profit margin on the background items.
Many unknowns remain surrounding the pandemic’s resulting global supply chain and manufacturing challenges. Retailers that rise to face these challenges will not only adapt to current conditions but will ultimately build agile and scalable processes.