The Dynamic Pricing War: Retailers
Need Answers in the Face of
Extreme Competition
RESEARCH PARTNER
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
The Competitiveness of Retailers is being stifled by the likes of
Amazon: A Closer Look at the Trends
On average 8 out of 10 millennials rank price of the product as the leading
influencer in the purchasing decision. Not surprisingly, most retailers have
been giving consumers unseasonal price breaks and promotions to match up
to the unwavering digital and off-price competition. Unfortunately for them,
in spite of such short-term measures they are clueless on maximizing price
and promotion effectiveness for consumers due to lack of focus on applying
consumer and data science to pricing and promotions.
8 out of 10
millennials rank product price as the
major purchasing decision.
• Lack of optimization and dynamic (real-time demand and supply data/insights) approaches in pricing, promotions
and markdowns gets translated into lack of customer focus, loss in operating profit, gross margin and inventory turns.
• The loss accounted due to lack of pricing optimization is 2.6% for gross margin, 3.2% for operating profit, 4% for lost
sales opportunity and 4.2% for inventory turns. A similar loss arising from absence of promotions and markdowns
ranges between 3% to 3.4% for inventory turns and lost sales opportunity and 2.4% to 3.2% for gross margin and
operating profit.
What’s pinching retailers the most or will have a long-standing effect on their profitability and base pricing strategies is
big retailers’, such as Amazon.
• More than 80% of retailers believe their maturity and competitiveness is at par with competitors but when it comes
to Amazon, just over a third (36%) feel they are at par and more than half (57%) rank themselves behind Amazon.
Clearly, Amazon is stealing the show when it comes to optimal pricing and promotions.
• Only close to 15% of retailers believe they are ahead in terms of maturity as compared to others (except Amazon).
The ‘Amazon effect’ clearly has an impact on their business and profitability.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
Other observable trends that are shaping pricing strategy are:
• Real-time data gathering from various traditional (e.g. POS) and non-traditional sources (e.g. social, Wi-Fi, others) and
the translation of such data into actionable insights across all retailers (both large and small).
• Need for deeper customer segmentation using a scientific approach so as to better understand the customer base
at a local store level.
• Higher expectations of personalized pricing and offers from consumers that leads to deeper customer-retailer
relationships and loyalty.
• Discount or off-price retail that has taken shape among 6 in 10 retailers, especially in the last two years. This trend has
surprisingly been strong even in the luxury segment.
6 in 10 retailers have taken to discount or off-price
retailing in the last 2 years.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
Retailers Remain Disconnected from Optimal Pricing & Promotions
2.1. Challenges and pain points
Despite having the knowledge that pricing and promotions are the key to remain competitive, retailers lack sufficient
analytical techniques for optimal pricing and promotions.
• For large retailers, the top 2 challenges are (1) lack of actionable pricing & promotion analytics to drive profitable
decisions and (2) inability to measure pricing or promotion effectiveness and financial impact.
• For mid-market retailers (with turnover above $1 bn), the main challenges faced are (1) increased vendor costs
and ineffective vendor negotiations and (2) inability to connect pricing, promotions and markdown approach to a
company strategy.
• It is quite evident that large and mid-market retailers are struggling to connect the dots between pricing and promotion
effectiveness and profitability.
Lack of actionable pricing &
promotion analytics to drive
profitable decisions.
Inability to measure pricing or
promotion effectiveness and
financial impact.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
2.2. Frequency of price changes: A more dynamic approach
Nonetheless, the retailers have still tried to adapt themselves in this dynamic environment by resorting to frequent instore price-related changes which ranges from ‘once a day’ to ‘hardly ever’.
• Large retailers resort to more frequent in-store price changes as
compared to small and medium retailers. Almost a third (28%)
resort to 2 times per week or even more frequent price changes
per week.
1 in 3
retailers resort to price changes
as often as 2 times per week.
• Large retailers are more agile to price changes for both in-store and online channels. 4 in 10 large retailers plan to
increase price changes in the stores by frequency (how often a product changes prices) and volume (number of
products with price changes).
• On the mid-market retailers front, they plan to spend more than large retailers on pricing & promotions in the
coming year to ensure that they do not lose out to the likes of Amazon and large retailers. Most large and mid-market
retailers acknowledge the need to spend more or the same amount as last year to remain competitive and meet their
objectives.
The Future: Capabilities
2.3. Planned capabilities to be built
So, how do the retailers see themselves being equipped with sufficient capabilities to dynamically manage pricing
& promotions? Is the use of advanced analytics for predictive and prescriptive pricing and promotions gaining
momentum?
• In-depth competitive pricing trends analysis remains the top capability that both large and small retailers plan to use in
the next 12 months. Competitive analysis requires deeper and faster category and SKU-level insights for competitive
pricing, offers and markdowns.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
• However, forward-looking large retailers are also inclined towards adoption of capabilities such as AI and machine
learning tools. Interestingly, mid-market retailers have emphasized that conducting price elasticity analysis is an
effective tool for smarter-focused pricing, while larger retailers are prepared to go further and focus on the adoption
of 1:1 promotions and offers.
• Large retailers will increase investment in areas such as localized and more granular pricing and promotion with a
focus on dynamic pricing as well as system integration of pricing, promotion and markdowns in the next 12 months.
• Additionally, this means that compared to today, retailers will lay greater emphasis on more frequent, dynamic pricing,
that will become more targeted through greater capabilities around customer segmentation and 1:1 capabilities.
• Nearly half (48%) of retailers are currently upgrading their promotions management/optimization capabilities or have
planned replacement in the short run while 18% have identified the need for such an upgrade.
• Similarly, on the price management/optimization front, the numbers are 42% and 20% respectively. This shows that
a fair majority of retailers are either upgrading or planning to upgrade their pricing and promotions management/
optimization capabilities.
• More than half (56%) of retailers have realized the importance of accurate demand forecasting and are upgrading
their enterprise systems accordingly. Accurate demand forecasts based on predictive analytics and an understanding
of product, customer and competitive elasticity will maximize financial impact of pricing and promotion activity of any
retailer.
• Merchandise analytics is already in-place for 4 in 10 retailers indicating the increased usage of analytics in this field and
another third are upgrading their merchandising analytics so that gut-feel approaches are replaced with consumer
and data science.
Close to
50%
of retailers are currently upgrading their
promotions management/optimization
capabilities.
56%
of retailers have realized the importance
of accurate demand forecasting.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
What Does the Future Hold: The Road Towards an Effective Pricing
3.1. Technology enablers
Realizing the importance of technology in ensuring an effective pricing and promotion strategy, large retailers foresee
higher spends in IT applications and infrastructure in the coming years.
• Spends on pricing, promotions & markdown solutions as % of IT budget is expected to increase in the next 4 years.
• The expected spend is much less for mid-market retailers compared to large retailers.
• Investment areas will not only focus on dynamic pricing but also
on artificial intelligence (AI) and machine learning tools. Dynamic
pricing has emerged a top 5 investment area for retailers and higher
expectations of personalized pricing and offers from consumers
is one of the leading trends shaping retail pricing today. Dynamic
pricing or high frequency pricing when done right, should function
in an automated process with exception management capabilities,
incorporating machine learning science, retailer strategic and financial
objectives, and pricing policies while accessing real-time competitive
pricing.
Dynamic pricing is one of the top 5
investment areas for retailers with
both large and mid-market retailers
increasing their spend on pricing
and promotions.
• Other retailers will include format-based pricing, localization models and integration with other systems.
3.2. Willingness for frequent in-store price changes
Till then, should price changes be reactive or proactive? Is a frequent price change to ‘follow-suit’ an effective strategy
for price optimization?
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
• A wide majority of large and mid-market retailers are increasing their
spend on pricing and promotions or keep the spend at a constant
level. Moreover, at least a third are increasing price changes in terms
of frequency and volume in the stores.
1 in 3
retailers have increased in-store
frequency and volume of price change.
• More emphasis should be on proactive price change anticipating market demand shifts through proper planning and
deep understanding of data via predictive demand analysis and consumer segmentation.
3.3. The road towards building capabilities
In the long run, the framework to build a strong capability rests on adoption of deeper analytics and more responsive
pricing, promotions and markdowns that are in line with market demand, consumer perceived ability to pay and
competitive trends.
• Integrating systems and use of data from varied traditional and non-traditional sources to forecast demand and
subsequent price changes is the key.
• Real-time data gathering (Big Data) is an important enabler in this effort as it helps in dynamic price comparison and
anticipating market demand.
• Other important planned enablers in the retailer’s arsenal includes merchandise analytics and markdown optimization.
Store and SKU-level merchandising analytics and markdown optimization strategies help streamline and optimize
merchandise buys and lifecycle pricing decisions for improved profitability.
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
Conclusion: Plugging the Gaps to Reap the Benefits of Optimal
Pricing
4.1. Absence of optimal promotion & pricing, lost opportunities: The implications and their spill-over effect
on consumers
Lack/absence of efficient optimization and dynamic solutions lead to (1) lost sales opportunity, (2) shrinking operating
profit and gross margin, (3) decreasing customer retention and loyalty.
• Such losses varies from 2.4% to 4.2% either in the form of gross margin or operating profit or lost sales opportunity
or as inventory turns.
• Retailers are unable to absorb increase costs, and are forced to pass these increases on to the consumer.
• With the lack of dynamic pricing capabilities, retailers are unable to respond to market changes and competitive
pressure at the frequency required. These dynamics result in retailers inability to offer competitive pricing to
consumers on the products that matter most to them.
4.2. Focus on building deeper and more agile price and promotional capabilities
For retailers, the immediate focus should be on building in-depth consumer and competitive pricing and promotional
strategies that power a faster response to rapidly changing market conditions, consumer expectations and competitive
pricing. Machine-learning science and analytical capabilities that are predictive and prescriptive at a granular level
should be adopted to support pricing and promotional strategies in a dynamic environment. Once adopted, the
process of optimal pricing and promotions will be a considerably less painful process.
Retailers should focus more on leveraging machine learning science to
build prescriptive analytical capabilities to empower dynamic price and
promotion optimization and in-depth consumer segmentation
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
Appendix
EKN 2016 Pricing survey demographics
EKN’s Adaptive Pricing, Promotions & Markdowns survey 2016, surveyed more than 100 retailers across US and Europe.
Primary product segment
23%
30%
Organization’s annual revenue
Specialty Retail*
20%
24%
Grocery, Food & Supermarket
$500 million to $1 billion
Apparel & Accessories
17%
15%
Convenience and General Merchandise
$200 million to $500 million
$1 billion to $5 billion
26%
30%
Others
$5 billion +
15%
Business function
21%
25%
Designation
13%
IT/Technology
Marketing (Includes Mobile, Social)
9%
10%
10%
Merchandising (MIS, Category Planning
& Management, Pricing)
14%
24%
16%
CXO
Sr. Manager
SVP or EVP
Manager
VP
Sr. Director
Store Operations (Store, POS)
Others
8%
30%
20%
Director
Figures are percentage of total respondents
* Note: Specialty Retail includes Consumer Electronics; Do-it-yourself/Hardgoods stores; Sporting Goods and Discount stores Grocery, Food & Supermarket includes Department stores
The Dynamic Pricing War: Retailers Need Answers in the Face of Extreme Competition
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