While eroding prices of technical consumer goods may excite the increasingly savvy and deal seeking Connected Consumer, they can be a big problem for product manufacturers and their retailers.
Lower prices mean lower margins, and in today’s evolving omnichannel environment, it’s important to understand which promotions with which retailers bring back the highest ROI, as well as the impact retail promotions have on sales and margin.
For example, in the durable goods market, a 10% cut in price could mean a 25 – 30% loss in margin for the retailer. This is a big challenge if manufacturers have hundreds or even thousands of units in stores and distribution centers.
Often a price drop starts with a single retailer, which can be due to a consumer price promise, pricing policies, or pressure from their competitors. It’s important for the manufacturer to be able to spot price erosion early and act quickly before the price becomes set at that level.
Does offline pricing on promotions drive down online pricing?
It is easy to assume that online retail activity is responsible for driving pricing down since online sales continue to draw consumers away from traditional brick and mortar stores, and there are countless examples everyday of where this is happening, but is this the full story?
In the below example which shows price erosion after the launch of a new TV set, we see that indeed an online retailer initiates the first drop (green circle), however, this is not the complete picture. Looking at the development of online and offline retailers, a far bigger impact on price was a promotion flyer published by an offline retailer.
To get a complete picture of the market and how to react, brands and retailers benefit from being able to see both offline and online pricing so that they react to the correct market activity.
In many markets, particularly larger geographical territories, the influence of offline marketing and in-store pricing is significant. In these markets, there are regionally focused retailers and managers within larger retailer groups that have more pricing autonomy. This leads to local pricing decisions that can drive the price below the online retailers serving the whole market with one single price position.
Identifying this typically short-term behavior can reduce price-following activity which increases margins for retailers and better supports the manufacturers’ price position.
Slowing down price erosion
Combining daily online and offline promotional pricing can provide insight into the impact of offline activity and online pricing. By aligning these two data sets with market data you can get unique insight to support better price and promotion decisions.
While the objectives of at-launch and in-market pricing can vary (to maximize profit, gain market share or maximize penetration, minimize cannibalization within the portfolio, etc.), retailers and/or manufacturers can manage price erosion even more confidently if, additionally to knowing which price the product was offered at, they also know what consumers are willing to pay for this product, and where the optimal price point is for it to meet its objective.
Insights on consumers’ budget restrictions and price perceptions are crucial to securely determine and steer pricing along the product life cycle. Virtual store experiments with consumers are an effective way to quickly and confidently determine the price-revenue-profit triangle at different price points within the competitive set, and give manufacturers more confidence in their price decisions, and ultimately optimize the ROI of each SKU.
Ultimately, price erosion is part of the product lifecycle, but slowing down unwanted and unexpected price drops can have a big, positive impact on margins for both manufacturers and retailers.