Consumer price sensitivities have changed in the pandemic. What does that mean for your pricing strategies?
The economic turmoil cause by COVID-19 has been pretty overwhelming. In September 2020, Pew Research Center found that half of adults who said they lost a job due to the coronavirus outbreak were still unemployed. Another Pew Research Center survey conducted in January 2021 revealed that among those who say their financial situation has gotten worse during the pandemic, 44% think it will take them three years (or more) to get back to where they were a year ago. Consumers understandably have an increased price sensitivity today, and retailers must be thoughtful to price accordingly.
I don’t have to go into more detail about the disruption and heartache – we’ve all been a part of this shared human experience. But as we anticipate the “new” normal and make decisions to improve business outcomes, I do want to speak to how discernable changes in consumer behavior impact retailers’ pricing strategies moving forward.
Economic dips translate to both shifting loyalty and sensitivity to price
McKinsey found that during COVID lockdowns, 40% of consumers said they tried new brands or made purchases with new retailers. This demonstrates the decreasing commitment to brand loyalty when consumers are thrown an economic curve ball – when they make decisions more out of necessity than based on preference. Plus, another recent survey found that of a list of retail factors, traditional in-store shoppers are most concerned with price.
This shouldn’t be surprising. Faced with unemployment or less-disposable income, people need to extend their budgeted grocery dollars much further. When you consider that some weekly meals were once subsidized by schools or provided as an employee benefit in workplaces, the increased number of mouths to feed at home becomes really apparent. As consumers make in-aisle decisions about the most crucial products to keep their families fed and healthy, retailers must ensure they’re offering the right price on those key essential items.
Remain competitive while keeping consumers comfortable with price
Some retailers have fared quite well through COVID so far, grocers especially. But the last thing consumers want to see is a price increase on a product they greatly need. Retailers had to be careful last year to not have any appearances of price gouging, and I’d offer that now is not the time to become less conscious of that perception. Retailers have goals for revenue and profit, but you also want consumers to trust you as they have their retail needs met. Will the consumer feel that you recognize their struggle? You can (and should) price in a way that guarantees they feel understood and cared for.
The smartest retailers in 2020 were those who sought to keenly understand which items are most valuable to their customer base, and why, recognizing that changing consumer priorities may have caused previously identified key value items (KVIs) to shift. With inherent models for price sensitivity, Revionics’ system will tend to recommend more price decreases on critical items that customers are demanding, and more price increases on items that are inelastic, less price-sensitive, and less likely to be one of those key items that people absolutely need to survive.
Embracing an innovative solution for pricing optimization will help you to adjust and adapt as trends continue to evolve. With the right analytics, you’ll have the flexibility to move on prices as different demand patterns and customer perceptions change.
AI-based pricing optimization helps to price correctly in the face of increased costs
No one could have predicted the way consumer preferences would evolve during a global health event, nor could any organization have adequately planned for the supply chain challenges and increased vendor costs. So, how do you rebalance the portfolio in a way that isn’t just taking price increases where you see a cost increase? Revionics’ AI-based pricing solution ingests data and quickly turns it into predictive pricing recommendations, providing clear steps to take when a cost increase happens.
Take a look at the following scenario as an example:
- Item A and item B each had cost increases of 20%
- Item A is highly price-sensitive and considered a critical item to customers
- Item B is a more inelastic luxury item
You may think it’s inevitable to make up for those costs with a 20% price increase on both items, but that’s certainly not the case. (And that’s great news, since we know how price sensitive consumers have become.) You can actually take item A down in price and increase the price on item B, and the result could be better for your business. You’ll sell more units at a lower margin per unit, but the more units you sell may actually get you a higher profit dollar. Taking the price increase on item B will help to fund the margin investment on item A. And at the end of the day, both you and the customer are happier.
Make your company better while making consumers better off
The goal moving forward will be to find the right balance of price cuts and price increases to keep customers happy and business thriving, even in a difficult landscape where consumers are more price-sensitive. Partnering with Revionics is really a win-win scenario: customers are reassured by finding the best prices for the items they need, and retailers become increasingly capable of achieving their financial goals.
To learn more about responding to price sensitivity, check out the case study of Revionics’ customer Drogaria Araujo. Several years ago, when the economy dipped in Brazil, the drugstore chain recognized the need to optimize and localize their prices. The team pursued a science-based solution to help them excel in an uncertain economic landscape, and by embracing innovation, they were able to deliver the best prices to customers while also seeing significant margin and revenue increases.