Four Pricing Dimensions that Reduce the Impact of Showrooming
By Laura Wheeler DeYonker, AbsolutData
Recent data from Harris Poll shows that weaknesses in retailers’ pricing, product information and customer service strategies lead 43% of customers to showroom — creating a situation where brick-and-mortar retailers incur all the sales costs and online retailers make the sale.
This makes it difficult for brick-and-mortar retailers to compete with online-only vendors because of high overhead costs. One way brick-and-mortar retailers can contend with showrooming and remain competitive (aside from product differentiation and enhanced in-store experiences) is to create unique pricing strategies with the help of Big Data. When done correctly, flexible pricing strategies allow retailers to offer more competitive pricing for consumers, while still enjoying high profit margins.
To determine which products will provide the highest returns on pricing strategy investment, retailers should ask the following four questions:
1. What: What items are most critical to focus on? Which items drive price perception (the customer’s judgment of the price) or have the highest impact on overall store sales when there are price changes? By targeting the right products, a small change in pricing can make a big difference to the retailer’s bottom line.
2. Who: Should prices be differentiated for various audiences? If loyal customers are rewarded with a lower price, will that still allow for a healthy profit margin?
3. Where: Should prices vary across regions or even channels? Do different regions have different price elasticity that a retailer can take advantage of? Should online prices be lower than in store to better compete with showrooming and online-only retailers?
4. When: When should you mark items down? When should you run promotions? How deep should markdowns and promotions be?
Owned Versus Competitive Data
Answers to these questions will vary depending on the retailer, specific product and time of year. When it comes to the use of Big Data to answer these questions for your business and create unique pricing strategies, retailers should focus on utilizing two specific types of data:
Owned data: Retailers should understand price elasticity of an item and its relationship to the total volume of products sold. When price decreases are made on key items, the volume changes may be more than just an increase in that single product. If the item is a traffic driver or has a lot of related sales, it may drive even greater total store increases. A clear understanding of price elasticity and key value items (the items that have the highest halo effect from price changes) will help retailers determine which items are most important to be sharp on pricing.
Competitive Data: Internal data is important but retailers can’t afford to operate in an information vacuum. Though harder to track, competitors’ prices are an important factor and need to be considered when designing a flexible pricing strategy. Consumers often compare prices across stores but it may not be possible for retailers to react to every competitor’s price change. The implementation of flexible pricing strategies on key value items allows stores to maintain a consistently competitive price and in turn, generate higher profits.
By analyzing both owned and competitive data, retailers can create a manageable process for pricing strategies that leverages internal factors and the realities of a competitive marketplace.
Holiday promotions are also a great opportunity for retailers to employ pricing strategies on key items. Understanding historical sales patterns and any changes in these items around a holiday period will help retailers successfully manage prices around important selling periods, such as Labor Day Weekend. Although holiday sales occur at similar times each year, competitors may promote differently. Different stores will also have different impacts from pricing strategies. Building price sensitivity models for key items ensures that a smart retailer can be proactive or reactive to competitor moves on those items each year.
It’s important to remember that a flexible pricing strategy is not for every product, and its effectiveness depends greatly on the industry, region and retailer. The foundation for any strong pricing model is a skilled analytical team with sophisticated resources. Whether in-house or through a third-party provider, analytics teams must utilize both owned and competitive data to organize and approach pricing strategies with the four key questions in mind.
Laura Wheeler DeYonker is VP of client services at AbsolutData.