Across the board, retailers are facing huge cost pressures with currency fluctuations, inflation, rising energy bills and commodity prices, higher transport costs and challenging labour markets.
For online businesses, while they benefit from not having to also front the bricks and mortar running costs of physical retailers, the lack of incidental footfall and fewer opportunities for impulse purchasing may mean they feel the effects of consumer budgeting more acutely.
Clearly, households will be looking for savings to help manage their finances as we move into the autumn and winter months, so those retailers that are able to offer them may well win new custom.
Some major businesses such as Primark have recently pledged not to introduce further price increases this financial year, in contrast to a wave of price rises from retailers in other markets.
Similarly, Sainsbury’s has announced it is investing £60m in keeping food and grocery prices low, delivered through a number of initiatives that will allow the grocer to offer promotional pricing on some of its highest volume lines.
While public statements of price freezing can be a way for retailers to demonstrate that they understand the challenging times their customers find themselves in, price freezing is very often a lose-lose situation.
The downsides of price freezing
While Primark may have the benefit of being able to manage its store network to offset some of the increasing costs and hold their prices, and Sainsbury’s has the option of increasing its prices outside of the promotional items, in most cases the retailer is just giving up margin.
In addition to this, there is no guarantee that price freezing won’t lead to greater pressures as margins drop while costs increase. Primark has reduced its profit margin forecast for the next financial year as a result, and Sainsbury’s investment will be coming directly off the bottom line. With customers tightening their belts and therefore making fewer purchases, a drop in revenue may make the squeezed margins feel even more challenging.
Freezing prices across the board means that retailers lose the benefits of a nuanced approach to their pricing execution, and aren’t able to make adjustments on some channels or product lines to help with pressures elsewhere.
Looking ahead to the next financial period, any brand reputation gains may be cancelled out if retailers are forced to make large price increases while their customers are still managing their own reduced budgets. If these increases happen out of step with the rest of the market, the impact is likely to be magnified.
Gaining control with visibility
Instead of price freezing, the alternative is a data-led pricing strategy that uses intelligent pricing tools to be responsive to change. In the current context of volatility businesses need to be able to make more frequent, more targeted, and more responsive price adjustments, rather than relying on one-off price increases or freezes across the board.
More sophisticated pricing strategies have the advantage of allowing businesses to be responsive, but are much harder to manage, particularly when pricing is still a manual exercise for many.
In response to this, automated intelligent pricing offers one of the most effective solutions to businesses managing complex pricing requirements. Its key benefit is that it enables businesses to collate data from a wide variety of sources and bring it into one platform, providing them with an immediate view of their costs and allowing them to see margins in real time.
Most businesses will recognise that effective forecasting is increasingly impossible, with this month looking different to last month, and different to the same month last year. This means that a pricing strategy needs to be agile enough to flex to market variability.
Variability is best tackled with visibility, and visibility comes with having the pricing data across the board to view margin performance across categories, subcategories and SKUs. Visibility means it’s possible to model out a margin strategy that allows give and take across categories, but still hit margin goals.
Ultimately, when everything else feels unpredictable proper visibility gives a much-needed sense of control and certainty. A good pricing strategy with the right pricing tools empowers businesses to execute pricing with certainty.
While price freezes may seem like a way to secure customer loyalty through these turbulent times and may well be the appropriate strategy for businesses able to make efficiencies elsewhere in their operations, intelligent pricing offers a much more reliable strategy for retailers as they continue to navigate the turbulence ahead.
John Moss is CEO of Flintfox