Retailers famously live and die by the holiday season each year, but as the 2021 season fast approaches, the stakes are higher than ever. Will experience-deprived shoppers who had to forego travel and dining out during the waves of pandemic be in the mood to splurge? Or will the specter of rising inflation, ongoing trade wars, successive pandemic outbreaks and Brexit shocks put them in a more somber, conservative mood?
The only certainty is that there is unprecedented certainty going into this year’s holiday season. Fortunately, retailers can leverage today’s AI-based pricing solutions to have real-time insights into shopper demand signals and competitive behaviors, down to the item-channel-store level. The result: automated delivery of prices that resonate with shoppers on the items they care most about, with the ability to surgically recover margin elsewhere in the mix on items they are less price-sensitive on.
Gut Instinct is SO Last Season
Regardless of how the next few months and weeks unfold, some core assumptions are changed forever. A year and a half into a global pandemic, shoppers’ behaviors are profoundly changed on key indices – such as an irrevocable shift to online channels, even in traditionally resistant sectors such as grocery. And of course rising inflation doesn’t just impact the end consumers. Salesforce projects that US retailers alone will face an extra $223 billion in costs of goods sold this holiday season, including year-over-year surges in freight, manufacturing and labor costs. British retailers face additional complications from an acute shortage of workers, which severely impacts the domestic supply chain, and the continuing fallout of Brexit disruptions.
Clearly retailers cannot base their price and promotion strategies this year solely on the experience of prior seasons. But they can adopt data-driven strategies that adapt to rapidly changing shopper and competitor trends. Pricing team members freed up from repetitive tasks by optimization software that proactively recommends optimal price changes and promotional offers, prioritized to focus on those that deliver the most impact, can instead focus on strategic activities such as what-if scenario analysis to show how a given price or promotion will impact overall unit sales and turnover, as well as margins and the bottom line.
Cross-Item Effects at Your Fingertips
The ability of AI science to take into account cross-item effects, such as halo and cannibalization, gives merchants and pricing professionals a holistic view of how a single price change or promotional offer will affect a category overall. This ensures that the team makes informed decisions. For example, they may be able to deliver a more aggressive price on a key value item where shoppers are particularly vigilant about prices with the insight that the item drives increased sales of two other halo-effect items that are margin-rich – resulting in a higher blended margin overall. Alternately, seeing that a given promotion that resonated in an earlier holiday season drove significant unit uplift might be tempting – until science-based insights reveal that the promotion so cannibalizes high-margin alternatives that the damage to the bottom line is counter to overall business goals.
Moreover, modern optimization solutions enable the pricing team to ‘adjust the dials’ for any given item or category – weighting one more toward driving units and another toward delivering margin, for example. With the ability to set the guardrails and adjust them for the evolving business at any time, retailers have the confidence that the automated recommendations are in line with their overall financial goals and targets.
There’s yet one more compelling benefit to leveraging a data-driven approach during the holidays and beyond. Stocking up in anticipation of strong demand is a great move – unless you’ve priced wrong and fail to entice shoppers with the right prices and offers to drive units. The result can be costly post-season markdown events that leave retailers stuck with short-life seasonal items that necessitate steep marks or even complete write-offs. While markdown optimization can apply data science to generate best-case markdown plans, the smarter path is to manage holiday season demand at the item level with optimized pricing and promotions that minimize the need for markdowns to begin with.
The holiday season has never been more challenging or difficult to predict. Fortunately, the increasing complexity and volatility of the retail sector is offset by the road-tested ability of data science-based solutions to factor in myriad variables in real time. While human capabilities are quickly overwhelmed by the pace of change and the proliferation of data, proven science delivers measurable results that achieve the elusive win-win: prices that engage shoppers where it matters most, and healthy margins that ensure long-term ROI and sustainability in the business.
DemandTec offers end-to-end, AI-powered lifecycle pricing solutions for retailers globally.
1) U.S. Retailers Face Extra $223B in Costs of Goods This Holiday Shopping Season, Caila Schwartz, the Salesforce 360 blog, 20 July 2021.