When you’re working to triage a deluge of cost increases, it’s difficult to know the smartest pricing moves. Doing the wrong thing leads to the wrong outcomes, but missteps can be hard to avoid if you’ve never dealt with inflation like this before. Let’s identify some potential mistakes merchants can make when managing cost increases, so you will be better able to adopt a strategic and holistic approach to pricing. Here’s what not to do.
If margin maintenance is your biggest worry, pricing during inflation may feel like a game of Whac-A-Mole. You’re on the lookout for anything that pops up, waiting to counteract every cost increase with a proportionate uptick in price to maintain your desired margins. Or, you could be prioritizing your penny profits, turning up the pricing dial to guarantee the same profit on each sale.
With a bit more sophistication, you may look up from the math problem in front of you to peek at how your neighbor might be managing their cost increases. You wait for a competitor to move first on price before you decide how to respond. You worry about brand perception, not wanting to be seen as more expensive than the competition in the eyes of consumers, fearful of how that might impact their likelihood to purchase. Because of this, you’ll take the momentary hit of an initial cost increase during what feels like a strategic and sensible pause.
Then there’s the one-size-fits-all approach. What comes to mind for me is when I was a tortilla buyer at a major U.S. retailer. If there had been a scenario in which the price of corn went up, logic would say that all corn tortillas would cost more, so I could decide to increase prices across the board by 10 or 20%. After all, a rising tide lifts all boats, right? Not so much in this case. The more strategic approach would be to determine if one brand or variety should stay priced the same, or even take a price decrease, to lead to a more optimal outcome.
I mentioned the wait-and-see strategy, where you hold steady on a pricing response until a competitor makes the first move. An awareness of other retailers is important, but unless you can see the complete picture, you’re making decisions on a case-by-case basis in a vacuum of hypotheses and potentially inaccurate assumptions. You don’t understand the competitive dynamics: which retailer is more or less likely to follow you, and with what frequency someone else in your space changes prices.
You could be looking to the wrong competitor entirely, one that may or may not be making the wisest pricing choices themselves. It would be tremendously valuable to know there’s a competitor undercutting you on price by 5 cents, for example. If you don’t know which regions or stores you’re winning with price, or that you might be cheaper online than your competitors, your pricing decisions aren’t as competitive as you might think. If you don’t have a view of the total ecosystem, you’re not going to be successful tailoring your strategy to beat competitors.
It’s also possible you’re not pushing back enough on vendors. You agree to the cost increase they communicate and then work backwards to reconcile it on your own. But with more analytics available, you can partner with your vendors to come to a win-win situation, making the reality of a cost increase a good scenario for you both.
You could say, “Look what happens for me when you raise your price by 20 cents. What would it look like if you only raised my cost by 15 cents?” Explore what it would mean for the vendor’s unit volume, for example. Push for access to more robust analytics, and you’ll be able to nurture a beneficial partnership relationship during this inflationary time.
It’s a whole new retail world out there. What worked before isn’t going to cut it now. You need predictive analytics to help you see through the chaos and make informed, strategic pricing decisions.
Analytics also disassembles the one-size-fits-all approach so that you can do the right thing in the right market. What’s good in New York City or Chicago is likely not optimized for a rural town in Alabama or suburban Kansas City.
Managing cost increases correctly also requires your entire team to move in tandem. It hurts price image when, within a store, some buyers are taking measured, analytically informed price increases while others are taking larger ones to save margin without consideration of how it impacts the overall price perception. Overall price perception will suffer from the unaligned pricing strategies. A top-down approach to manage inflation is always better than one that is de-centralized and merchant-led.
The best way to manage inflation through pricing is to use an advanced pricing platform. Adopting a solution like Revionics will balance your price increases and decreases in order to improve share on key value items (KVIs). This enables you to provide better prices on the most important items to your customers, making up the difference by increasing prices on background items to maintain profit. If competitors are simply increasing prices in response to inflation, and you’re equipped with the data to take decreases – shoppers will remember that.
Because of the nature of supply and demand, there will always be an ebb and flow to the business of retail. I think that’s often what makes this industry so exciting to work in – no day is the same as the previous. There are always needs to meet and unique problems to solve for, and it is incredibly rewarding when you can see the positive impact of your decision-making. But in times of inflation, when a flurry of cost increases come all at once, it’s easy to feel discouraged. I’ve been there!
At Revionics, we’ve helped retailers in a wide variety of industries and markets navigate difficult economic conditions, including inflation. That experience means both our people and our science are better equipped to guide retailers through these current extremes than anyone else in the market.
Reach out to our pricing experts and start the conversation about how to better approach managing your cost increases. Forget the traditional method of passing the cost on to the consumer - we’d love to help you find a more balanced way.
Matthew specializes in Pricing & Retail Strategy, Corporate Strategy & Customer Focused Solutions. Matt is a leader in Pricing Strategy Development, Business Strategy Development & overall Corporate Strategy. Matt has a strong merchant background and experience with C-Level presentations. He has 20+ years of experience in Retail encompassing Consulting, Buying, Pricing, and Marketing across a variety of retail verticals, industries, and regions. Having lived and worked in France, Germany, Hungary and South Africa (with additional long-term engagements in other markets), Matt spent the last decade driving customer-focused success at Revionics.