With price and discounts remaining consumers’ key purchase decision factors, retailers are racing to change the way they set prices and markdowns.
Merchants are trying to navigate a narrow path: They don’t want to be undercut by competitors and lose sales, but they also don’t want to get caught in a “race to the bottom,” where price cutting becomes so extreme that margins disappear.
A new study by market research firm RSR shows dramatic changes in the way retailers set prices. For instance, more than three-fifths of retailers are now collecting data from “new channels,” or non-transactional areas, including consumer email opens and click-through rates and social media to help them make better pricing decisions, up from 38% a year earlier, the study found.
The RSR study, released in March, is based on a survey of 105 mostly US-based retailers. A majority of the respondents have at least $500 million in sales each and more than two-fifths of them generate at least $1 billion each.
The study found that 84% of retailers said they’ve increased either “somewhat” or “significantly” the price changes they sent to stores the past three years, the highest level since 2010.
And more than half of the retailers, or 55%, said they now share sales results with their suppliers to help decide how best to use “trade funds,” the allowances that vendors give to retailers to promote their products. That’s double from 27% a year earlier.
A majority of the retailers also said that they now have tools in place to manage prices and promotions across different sales channels and can quickly respond to competitors’ price changes.Nearly three-fifths believe real-time “dynamic pricing” is more effective than price matching.
As price matching has become the norm, offered by retailers from Walmart to Best Buy to fend off competition led by Amazon, nearly three-fifths of the retailers now believe real-time “dynamic pricing” is more effective than price matching, up from 43% a year earlier, according to the RSR study. (Dynamic pricing is based on a variety of factors including demand and inventory availability.)
Why are such changes imperative? Retailers admitted by the beginning of 2016 that their pricing practices had become “ineffective, almost to the point of damaging their business,” the study found.
“In the 10 years we’ve been doing this, price transparency has become a reality,” said Brian Kilcourse, an RSR managing partner and co-author of the study, in an interview. “That has caused retailers to have to change their approach to pricing…. Consumers have become addicted to that never-ending cycle of discounts…. They use their mobile devices to check on pricing all the time. Retailers can’t play games with them.”