The Magic Formula For Retail Profit

Solutions that help retailers set optimal prices are extremely effective levers to improve profitability -- by boosting sales, maximizing margins, and moving merchandise. The overall message of recent RIS research, Increasing Profits and Shopper Engagement With Advanced Price Optimization, is that Retailers have to incorporate customer insights into their pricing decisions and price optimize to boost shopper engagement and increase profits.

In view of the fact that two dominant trends in retail pricing processes are 1) high levels of price sensitivity and 2) vastly increased price transparency, retailers are compelled to take the large amounts of data that are now available and turn that data into valuable insights.

Pricing solutions have historically served as powerful, fast acting tools for retailers seeking greater profitability through improved sales and margins. It's not that shoppers will never pay higher prices for some items, the report says: It's that retailers need to take increased pain to demonstrate the relationship between the price a customer pays and the "value" they receive for nearly all items. 

Customers need to feel that they get a good value for their money. So it's more than slapping a price on things. It's taking the time to make clear to customers the reasons for the value. (Witness Ron Johnson's doomed stint at JCPenney where he removed the sales, special and coupons that were the retailer's traditional traffic stimulants -- without adequately conveying the benefits of the new non-promotional pricing structure).

Customers' perception of what is a fair price for an item will also depend on context. (e.g. a shopper's demonstrated interest in an item, how they have seen it priced in other locations, and what they have paid for similar items in the past).

The spread of consumer mobile technology -- leading to cross-channel price transparency and showrooming -- is another challenge to retailers' pricing strategies.

Using pricing intelligence solutions retailers can:

-- More accurately target initial prices, the timing and size of markdowns and the amount and type of promotions offered to different shopper segments.

-- Be more strategic about setting optimal prices within and between channels. How much do cross-channel pricing discrepancies bother your customers? Having lower prices in one channel versus another may be a deal-breaker to some shoppers, but for others it can have little to no impact on their buying decision.

-- Refine and target price matching strategies. Some retailers have reacted to showrooming with across-the-board price matching strategies, but these can be used more sparingly to accomplish key strategic goals. Refer to price matching.

-- Target showroomers with their own tools and the data gleaned from them.

-- Increase online traffic, improve conversion rates, maximize margins or move distressed or slow-moving merchandise.

-- Factor price optimization solutions into order management, inventory availability, and assortment.

Bottom Line For Your Bottom Line:

Achieving optimal pricing is a critical part of any retailer's branding, marketing, merchandising and operations. Using optimal pricing as a tool for improved profitability and customer engagement, retailers will recognize greater profitability through improved sales and margins.

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Gilon Miller

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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