Pricing Strategies for Supply Chain Shortages

How retailers can use pricing as a quick way to influence supply and demand

In the wake of COVID-19, the beleaguered retail world continues to face a slew of challenges. While we have talked a lot about inflation lately, another ongoing issue retailers are tackling is supply chain shortages. According to NielsenIQ, out-of-stocks cost fast-moving consumer goods (FMCG) retailers $82 billion in missed sales in 2021. While supply chain shortages can’t be overcome with pricing alone, we do have a few pricing strategies that can help to alleviate the situation.

Pricing related to supply and demand

First, let’s briefly look at the nature of supply and demand. Retail is essentially all about supply and demand; yet demand is more important, because without it, supply means nothing. Consider some top brands like Apple or Tesla that create demand by purposely limiting supply. It is an effective strategy that works in their favor from both a sales and marketing standpoint. In the reverse, a large supply of something that nobody wants to buy is considered a retail failure. Supply is only important if it is solving a consumer need – people have to want it.

Because retail is a delicate balance of supply and demand, one could make the argument that pricing is the most important function of retail. I say this because pricing can shift demand and unit volume, and can do so very quickly. Changing prices takes much less time than improving supply chain logistics, and yet can have a significant impact on supply.

If done well, pricing can be a game changer when dealing with ‘lumpy’ supply chains. An effective pricing strategy can quickly shift demand onto products with higher inventory and shift demand away from products with lower inventory. So, instead of disappointing customers with out-of-stock items, retailers can entice consumers to alternative products or brands and balance inventory levels.

Influencing demand the right way

Of course, driving demand from one item to another requires data analytics to be successful. You must have a good understanding of your customers’ needs, as well as strong forecasting to understand how they will react to price changes. Analytics can also help you dive further into how affinity and cannibalization will impact demand.

Two other factors to consider are location and channel. Your inventory levels could vary greatly by region, store, or channel. With data-driven zone and channel strategies, you can tailor pricing to adapt to local market supply challenges and consumer demand behaviors. For example, if there is a shortage of a certain product in the Pacific Northwest, but not in the Northeast, your pricing should adapt based on supply levels and consumer preferences in those specific markets.

Not only should your pricing moves be data-driven, but with the right automation and optimization pieces in place, you can influence demand seamlessly and efficiently. Using an AI pricing solution, retailers can not only guard somewhat against supply shortages, but do so in a way that drives what we call trifecta growth – increased units, revenue, and profit – while simultaneously improving competitive positioning in the market.

Base, promo and markdown pricing strategies

The above principles can be applied across base, promotional and markdown pricing. Now let’s look a little more closely at specific strategies in each of those three areas of pricing.

In addition to the other pricing tactics listed earlier, another approach that can be leveraged with base pricing is to promote ‘trade-up’ strategies. With limited supply, it would benefit retailers to focus on sales that increase average unit retail instead of average units per basket.

When there is a global shortage of products, it is more critical than ever to eliminate ineffective promotions that drive volume but lose revenue and profits. Promotional effectiveness analytics are crucial to helping retailers decide how to adjust and shift promotion strategies to better balance strategic priorities and limited supply, as well as calculate the impact of shifting promotional offers from one poorly stocked, high sales brand to another with higher inventory.

Markdown effectiveness also becomes more critical with limited supply, for a few different reasons. For one, if the supply of a new item gets delayed, a markdown may need to be prolonged until there is sufficient stock to fill the empty shelves. In this case, retailers will want to optimize markdowns to keep the shelves full and drive profits for longer. On the other hand, retailers may choose to start markdowns later due to less supply overall. Here, the imbalance of supply and demand and the ‘lumpiness’ of inventory across stores and regions will make it even harder to execute markdowns effectively without proper optimization.

Finding supply and demand balance

Supply and demand are two sides of the same coin. To use another metaphor, they are like diet and exercise. Together, a healthy diet and active lifestyle will contribute greatly to your overall health. However, if one breaks down (say you break your foot and can’t workout anymore), staying strong in the other can help counter, or even overcome, the negative impacts. Overtime, it is best to do both well, but if you are going to eat ice cream for dinner it’s still better to go to the gym than not!

If your current processes and systems don’t provide the data insights you need to make informed pricing decisions to balance supply and demand, reach out to our team to see how Revionics can help. With the holidays around the corner, now is the time to set your organization up for success, despite the current challenges.