Retailers turn to price optimization as inflation shows no signs of slowing down

Matthew Pavich is a contributor to Supermarket News and managing director of global strategic consulting at Revionics, an Aptos Company. The views expressed here are those of the author.

As the U.S. economy recovers from the pandemic, prices for goods and services continue to climb, with the U.S. Department of Labor announcing on July 13 that the consumer price index for June increased 5.4% from a year earlier, the largest jump since August 2008. And, according to some experts, there’s a good chance inflation could remain elevated for years to come.

For retailers, inflation represents another hurdle in a long list of pandemic-induced volatilities. From panic buying and store closures to operating restrictions and supply chain shortages, to new consumer behavior shifts and revenge shopping, retailers have had a lot to contend with.

This widespread unpredictability has also wreaked havoc on traditional pricing practices based on supply and demand. And now, with the rising costs of goods squeezing already squeezed margins, retailers are turning to science — particularly, artificial intelligence (AI) pricing technologies — to find relief.

Rethink Your Response to Rising Costs

When a cost increase crosses a retailer’s desk, a natural next step is to think, “How much should I raise my retail price?” In many cases, retailers end up using simple rules (e.g., increase by X% or maintain current margin or similar penny profit) when faced with rising costs.

Related:The role of pricing in changing brand loyalties at grocery

But taking a price increase in this economic reality feels counterintuitive to satisfying shoppers, especially price-sensitive ones. Grocery budgets are tight, and consumers are feeling the effects of inflation as well.

Ultimately, across-the-board price increases in response to inflation hurt retailers’ ability to achieve optimal outcomes at a time when pricing can be such an important strategic lever to increase both profits and share.

Savvy retailers are instead recognizing that inflation could actually be an opportunity to utilize AI and price optimization software to achieve revenue growth while still keeping customers happy.

But to do so, it requires a balanced approach.

Take a Data-Driven Approach to Pricing during Inflation  

With inflation showing no signs of slowing down, retailers need to adopt a science-based and balanced approach to remain profitable.

As a first step, retailers should determine which items are most important to their shoppers via a key value item (KVI) analysis. Armed with KVI data, retailers will know when to hold prices steady or even decrease prices on the items that matter most to consumers, while introducing higher prices on less critical background items.

Related:5 key mistakes retailers make when moving to online grocery

As brand loyalty is on the decline, it is more important than ever for retailers to find the optimal price of goods. And that means tapping self-learning algorithms that can scan vast amounts of data, calculate myriad pricing scenarios and suggest the best possible price to satisfy customers, drive increased sales and optimize profit margins.

When done properly, everybody wins — consumers get lower prices on the items they care most about, and retailers drive balanced growth. Allowing advanced pricing science to find that balance is critical and enables retailers to arrive at outcomes that couldn’t otherwise be achieved.

Keep an Eye on Competitors’ and Customers’ Response to Inflation  

Consumers today are only a click or two away from conducting a price comparison; needless to say, competitive pressure is at an all-time high. For this reason, it’s critical to understand what your competitors are doing in response to inflation.

Having competitive analytics in place will help you understand how other retailers in your space are leveraging price to protect their margins in an inflationary period and will naturally help you determine how to react in comparison.

Having a granular and intimate understanding of your customer is also imperative during inflationary times. What happens when a shopper buys Item A? What else do they buy if Item B and Item C are in their shopping carts?

Going even further, if you have customer-level analytics, you can understand that Shopper X comes into the store more frequently than Shopper Y. Or Shopper Y will spend a certain amount on an average purchase versus Shopper Z.

If you maintain a deep understanding of what your customers are buying and how their demand fluctuates in relationship to price, along with insights on where you stand compared with your competitors’ pricing, you’ll be able to take the challenges of pricing through inflation in stride.

Turn Inflation into Opportunity

In addition to maintaining strong relationships with consumers during times of inflation, with price optimization science, retailers can also find ways to strengthen their relationships with strategic vendor partners.

With access to predictive analytics, retailers can evaluate impacts of cost increases and communicate those impacts during negotiations with vendors. If a vendor is able to see that a smaller cost increase will lead to a better overall outcome than a larger cost increase, they may be more flexible in their negotiations, which can help you reduce costs.

While many view inflation as a threat, it can actually be an opportunity to grow share and profits and strengthen price perception using a proven approach that is a win–win for retailers, consumers and vendors alike.

The fact that some retailers will stick to extreme price increases and unsophisticated methods makes them a target for the more sophisticated retailers during a critical time, and there will be clear winners and losers in this inflationary period.