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Retail Pricing Fundamentals

There’s a famous saying from Warren Buffett about price: “Price is what you pay. Value is what you get.” 

Inflation has come down from its peak in 2022, and the supply chain “bullwhip effect” has moved to excess supply from limited inventory in 2021, so what customers pay and the value they get have come back into focus for retailers.

Pricing (and product costs) is the third of our retail pillars for 2023, along with omnichannel fulfillment and retail media networks. These priority topics were identified through our work over the last several months and came up often in conversations with executives.

Retailers have won back some leverage in discussions with suppliers, in large part due to the broader macro conditions, which have resulted in more price-conscious shoppers. The shift has prompted retailers to aim for pricing improvements to win customers and pick up market share.

Gaining market share – through dropping prices or better customer experiences – is a hallmark of successful companies amidst similar macro environmental conditions. Tesla recently dropped the price on its cars by 20% to start the year with the same goal in mind: to win market share and crowd out competitors, given the popularity of electric cars with consumers.

Here are some ways you can improve pricing to drive sales with customers and pick up market share along the way.

#1 Evaluate your sales and market share to identify how to best meet customer demand

The “disinflationary process ” is underway, Fed Chair Jerome Powell recently stated.

This means that identifying the highest priority areas to meet customer expectations is important among many competing concerns because the timing to re-open conversations with suppliers is right.

As an executive from one brand recently told us, “We are seeing our input prices come down and expect retailers to ask us to cut prices this year…and it’s probably the right thing to do for the consumer in the long run.”

So, where to start?

A helpful place to begin is by evaluating your sales and market share at a broader level and then drilling down on categories to identify areas of opportunity:

  • Have you won or lost market share in the last 12-18 months?
  • What categories have driven your market share gain/loss in the last 12-18 months?
  • What categories are you seeing customers trade down in terms of price (to private label, smaller sizes, etc.)?
  • What categories are driving increasing or decreasing basket sizes (by number of units)?
  • Where are the opportunities for private label expansion to bring more value for customers?

Analyzing data to identify how customer demand has changed and how to best serve them going forward is foundational for making impactful pricing changes to stimulate demand while driving bottom-line improvements over the long run.

#2 Focus on your category line reviews to drive cost improvements and pass along better pricing to customers

Once your biggest opportunities have been identified to drive demand through lower prices, then it’s time to negotiate better costs with your suppliers to pass along improved pricing to your customers.

Whether the strategy involves refreshed or expanded private label products, or strengthening your national brands, working with suppliers, through an annual documented category review process, is critical.

A category line review establishes a clear timeline and process to refine the assortment, evaluate pricing, and introduce new brands or products, which is essential to keeping a customer-first mindset.

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Updated planograms and in-store presentation are a key output from the category line review process to drive newness and better meet the customer’s needs.
Image from Designalytics

In fact, leading retailers, such as Target and CVS, have dedicated teams to drive the category review process(es) and identify opportunities that meet buyers’ goals while delivering the optimal negotiation strategy with vendors. The impact of having dedicated teams to support this process shows up through improved outcomes for retailers, such as better costs when negotiating with suppliers, as well as key ancillary goals, like new product innovation or optimal private label/national brand mix.

With the rigors of managing the day-to-day business for most merchants, and then having to conduct heavy analysis and communication with vendors to prep for category line reviews, the ROI of having dedicated support to lead the process is significant.

If you do not have a thorough category review process to work with suppliers and drive better outcomes for customers and your organization, consider building out a team – or starting with outside resources – to jumpstart this process.

This year it is critical to focus on an in-depth category review process, given the cost increases that have been passed along to retailers – and, subsequently, consumers – the last couple of years.

#3 Develop sustainable processes – including identifying areas for private label development to build pricing improvements into your regular merchandising workflow

Once you have established a clear, sustainable category line review process with articulated goals for each review along with support to analyze bids, then it’s time to negotiate with suppliers.

The number one way you can create leverage for yourself is by having qualified alternatives to your current suppliers.

This is primarily done by identifying suppliers ahead of the line review process that have products to meet your customers’ needs while helping you hit your category’s goals (both financial and strategic).

In many categories, qualified alternatives may also mean the addition of private label products, which can help you provide greater value to customers.

Private label is not always the right answer – as Bed Bath and Beyond shows – but can be introduced or expanded when it meets a distinct customer need. You can quickly identify private label opportunities in categories where customers regularly choose the lowest priced option or are brand agnostic, for example.

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Cautionary private label tale: Bed Bath & Beyond expanded its private label offerings too far to improve its bottom line rather than filling a specific customer need
Image from CNN

A successful category line review process requires up front preparation to analyze different options, along with focused bandwidth to achieve the identified goals.

Momentum, though, makes this all easier. So, once your organization has completed its first line reviews and delivered great results, it becomes easier to build the capability into the regular merchandising workflow on an annual basis and track results.

Having a well-defined and supported category line review process is the primary way you can deliver the best pricing for your customers on a year-in/year-out basis.

With costs coming down, where are you focused this year to drive pricing improvements with your customers?

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