Why is price optimization in retail so important?

The rise of price optimization in retail

To really assess why 2024 is seemingly shaping us as the year of price optimization, let’s take a quick step back and look at what happened last year. In spring 2023 I attended a closed-door virtual forum with one of our partners, talking business performance and future strategy with several retail C-suite executives, including the CEO of a UK retailer with around $1 billion in annual turnover.

They claimed that they were starting to see reductions in their raw materials costs, and had seen freight and logistics costs recover to the levels they were at before the disruption caused by the COVID-19 pandemic. As a result, they were looking to pass these savings on to their customers by lowering the prices of their products.

This is huge.

If some businesses are thinking in this way, the retail sector will soon see a divide between those who are able to do it and those who can’t. For the latter — those businesses that don’t have a good grip of their supply chain process or don’t have the right relationships with their suppliers — the only way they’ll be able to compete with the others is through discounting and promotions. And, from our experience talking to a number of retailers over the years, we know that not many of those businesses are discounting in a sophisticated, data-informed way.

This bifurcation of businesses has the potential to radically change the fortunes of retail and consumer brands. It’s impossible to look at the news these days without reading something related to the cost of living crisis, and what have become some really tough trading conditions for businesses to be dealing with as a result. And, throughout the rest of the year, we did start to see more and more businesses freeze or even lower their prices.

Grocers were the ones who led the way in this sense — the likes of Carrefour, Morrisons, Aldi, Tesco, Sainsbury’s and more came out publicly and said they were bringing prices down and they were investing in doing so. Non-food retailers, though, were slower to react — you can count them on one hand.

In the summer, Primark became one of the few non-food retailers that announced price cuts, closely followed by IKEA in November. Primark owns its supply chain, in the sense that they source and make their products themselves, which gives them the agility they need to do so. If you’re reliant on separate third-party suppliers, or middlemen companies, though, this makes things significantly more difficult.

Using a reduction in price to attract consumers

To summarize the story so far, the retail sector has been split in two in terms of who’s capable of reducing prices and who isn’t. The issue here is that those who are capable are transforming the expectations of consumers.

The already-savvy consumer is now getting more and more used to the concept of prices being reduced — it becomes the new norm and the expectation, even if subconsciously. “Finally prices have stopped going up. Some are even starting to come down! What a relief!”

The issue is that not every business is doing it. Consumers are now looking at non-reduced prices and, perhaps subconsciously, feeling like they’re too expensive. This is triggering, to an extent, a macroeconomic bullwhip where the only way some of these retailers are going to be able to compete is by improving their markdown and promotions strategies. But this can be challenging, and hard to pull off successfully.

Last year both Foot Locker and Macy’s declared that increased discounting, markdown and promotional activity had demonstrably negatively impacted their overall financial performance. It’s a trade off that is quite a serious problem in the current climate — your rate of sale on certain things has dropped to a point where you’ve had to get busy with markdowns, but you’re doing it inelegantly and are harming your business performance.

Price optimization in retail: why now?

It’s never a nice thought, but my prediction is that this problem will signal the demise of at least a handful of big name retailers over the course of the rest of the year. This isn’t a desirable outcome, but most businesses simply aren’t moving fast enough on this and looking at the way they approach pricing in a more sophisticated way.

The proof is in the headlines — last year a staggering 18.2% of all publicly-listed companies in the UK issued profit warnings. That exceeds those issued at the height of the 2008 financial crisis. And, when you slice that by the retail sector, the percentage becomes even higher.

Retailers need to act fast and rethink their approach to pricing, avoiding those margin-eroding blanket discounts and acting more strategically. The issue is that this is impossible to do manually — there’s a delicate balancing act between keeping stock moving, but doing so profitability. You could increase your rate of sale tomorrow, but that would mean hurting your margin. You could increase your margin tomorrow, but that would harm your rate of sale. It’s hard for businesses to find that sweet spot and achieve that necessary balance — but technology is here to help with that.

Peak’s pricing AI solutions are enabling businesses to optimize their pricing, with product-level price recommendations that find the perfect balance between customer demand and business goals, preserving margin and driving profit — all without spending weeks in spreadsheets.

To learn more, join our next live product demo and see our game-changing AI in action.