Preparing for a New Price Paradigm

For traditional retailers, the little price sticker on your favorite can of soup probably represents the last bastion of "how it's always been done." The way a retailer arrives at that magical number is a closely guarded secret, involving part competitive matching, part cost-plus calculation, and part pure gut feel. Balancing the true cost of a product with profitability to arrive at a figure that wins business has never been an easy task.

Major global retailers have understood that an analytics initiative offers fresh insights when formulating pricing strategies. But there is a huge variation in rigor and sophistication. Accenture studies have shown that approaches to pricing analytics vary by industry segment, market strategy, and analytical maturity. A retailer at an early stage of maturity may rely on just cost-plus estimates, while one at a more advanced stage may employ sophisticated pricing optimization models. Leading analytical retailers are working to systematically embed analytically arrived prices across all their products and categories.

In recent years, determining prices has become increasingly trickier. Web sites and mobile technologies that offer price comparisons have redrawn the power equation to a point where it is now the consumer that writes the sticker, not the retailer. What's more, the multiplicity of channels, both physical and digital, now empowers consumers to make smart purchase decisions irrespective of location. This evolving omni-channel shopping experience is redrawing the contours of modern retail.

These developments come as the result of four important trends in the retail sector:

  • Globalization: The rapid growth of middle-class consumption and accompanying retail traction in emerging markets like China and India
  • Mobilization: A virtual explosion in the use of smartphones and tablets for price comparison or as a point of sale, for in-store solutions, and for enterprise solutions
  • Large digital channels: Greater organizational and process integration with other channels to create a seamless experience for the customer
  • Transforming stores: Increasing deployment of in-store systems that are global, scalable, easy to deploy, multichannel integrated, and cost effective

These trends represent a huge challenge—as well as a huge opportunity—for retailers at a time when they are grappling with the effects of protracted sluggishness in consumer spending. Redefining the way retailers look at price determination is, in a way, the last piece in a jigsaw puzzle that portrays a whole new picture of retailing in the future.

The new pricing paradigm will call for a fundamental shift in the way retailers determine price. Companies that are able to convert data from both online and real-world environments into a 360-degree picture of individual customers and use this information to offer them bespoke price offerings will leave the competition behind. Retailers that have a wide breadth of functionality and services will thrive in the personalized, dynamic pricing future. Distilling our analysis and experience with leading retailers across the globe, here are five ways that companies can prepare for the future.

Accept that change is inevitable. Unfortunately, many traditional retailers are still in denial of the changes being wrought by digital commerce. But they cannot wish away one simple truth: Online stores will carve out larger slices of market share from traditional retailers. Retailers that recognize this early on can concentrate their resources on holding on to individual customers by offering their best patrons better prices.

As long as differentiated pricing strategies are seen as fair and transparent, customers will embrace the new pricing paradigm. Furthermore, accepting change means drawing up new strategies to tackle emerging pricing models. Dismissing the discount algorithms of online retailers could put brick-and-mortar retailers at a distinct disadvantage in times to come.

Adopt new tactics. As the focus shifts from pricing individual items or categories to the long-term economic value of individual customers, retailers will need to revise their analytics strategy too. The analytics will now need to optimize prices for individual customers, trips, and baskets.

As a consequence, retailers will need to find ways to deal with customers on the wrong end of the differential pricing continuum and who feel left out. Strategies to tackle such issues could include creating tiers of customers with benefits calibrated to economic value—or simply letting go of unhappy patrons.

Aggregate the right data. Retailers already have mountains of data. But this information may not be pertinent for price-related statistical modeling and predictive analysis. The real game-changer is "universal data," or general spending habits across channels and retailers (as opposed to spending in a specific store). This data can prove critical when determining prices.

Retailers also need other specific types of data, such as true costs (including "cost to serve"). The analytics emerging from crunching thousands of such variables may not only help determine the true profit of a price, but have implications for product range and inventory forecasting.

Assemble the infrastructure. Leading retailers know that building a robust supply chain—the ability to get goods in the store quickly and efficiently while limiting the amount of capital tied up in inventory—can prove a decisive ingredient of success. The transition to dynamic and personalized pricing will call for the construction of new types of infrastructures. These include wireless networks, integration with manufacturers' networks, and analytics systems that determine the right prices for individual customers and generate offers almost instantly.

Articulate pricing strategy via a dynamic customer interface. Traditional retailers would do well to learn from their online peers how to offer customized prices and bundles, dynamically and instantly. Retailers with physical and virtual stores can leverage both channels to generate an array of customized offers, depending on each customer's preferences and buying patterns. In this analytics scenario, the retailer sets the perfect price regardless of the channel. However, this is hard to pull off, and most retailers are a few years from trying it.

The tectonic plates of pricing are shifting. Data from all touch points is empowering today's retailer to make smarter, informed decisions. However, having the right kind of data and the right analytic tools could tempt many retailers to drill too deep. They must, therefore, tread a fine line between obtaining actionable insights that help them determine dynamic pricing options and invasion of privacy. Retailers that achieve this will be well positioned to offer shoppers a differentiated and personalized pricing experience.

Jeanne G. Harris is executive research fellow and a senior executive at Accenture's Institute for High Performance and directs the institute's technology and analytics research agenda. Milton Merl is Accenture's global lead of customer-infused retailing. He has 40 years in international marketing and consulting experience in the consumer packaged goods industry. Natt Fry is an executive director at Accenture, responsible for cross-channel retail strategy.

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