Are Retailers Giving Away Too Much?
The holiday promotion season is fast approaching with the arrival of Thanksgiving and Black Friday. From that moment the race is on for customer dollars through to the New Year. We’ve all been through this many times, and it seems like no sooner has one season finished than we are shortly into planning for the next. But what impact are the prices we set having on customer behavior and the profits of retailers?
Every retailer is looking to do whatever they can to get customers through the door – and spend! There are a lot of factors that influence each step of the buying cycle for customers and price and promotion assortment are clearly important, but is there a point where price loses its weight?
Not only that, but in what way do you offer that price? Is it straight discount across the board, category linked, or designed to encourage volume purchasing? And of course sometimes, the promotions retailers have to offer are in direct response to what is happening in the rest of the retail space, often forcing them to make promotional decisions that are not necessarily in line with the buying decisions they committed to for this season nearly a year ago.
One of the biggest mistakes made by retailers is to only consider their price and promotion decision in terms of the impact on competition, the margin on that product and sale volumes. The truth is that without the right scrutiny retailers could be pushing customers away from more profitable lines, or worse still combinations of lines, that they would otherwise be buying.
Retailers need to understand which products are the right ones to discount or promote and which, when promoted, will actually drive incremental sales and margin over their baseline sales. Often the products retailers promote are cherry picked by customers and never lead to incremental basket sales.
Data is the key, or is it? All of these problems can be answered with insight. The problem is that the vast majority of retailers have spent huge sums of money implementing systems that ensure they sweep up every conceivable piece of data into a big data store. Why is that a problem? It is happening so fast that they have tons of data, a little information, and even less insight. Many have been lulled into a false sense of security where they think because they are sitting on the data, all will be OK.
Understanding the relationship between your customer, pricing, promotion and assortment is critical to success, but you can only achieve this by building a web between all the key data points that you can then query at will, or better still instruct to find the best combinations for you.
The whole challenge is made all the more complex by external factors, all of which can be used, as data, to inform decisions: the competition, the weather or the economy, to name but a few. All of these impact the behavior of the customer in real time and affect their sensitivity to price. As a retailer you already look at the trend data you hold, but you must be able to quickly review the impact of your pricing decisions, so you can adapt with the customer and the competition in near real-time.
You probably thought, I meant giving away too much discount at the start of this article, but the impact of poor insight is much bigger than discounts or promotions. You could end up giving away too much in terms of discount, margin or customers to the competition. You also might be giving customers too big a discount, for no real gain. Does an extra 10% off bring in more customers? More sales? Maybe, but did it bring in enough and what was the impact on related lines that have better margin?
It might be too late for this holiday season if you don’t already have the systems and processes in place to get the kind of insight that I have outlined above, but there is plenty of time to prepare for 2016. Online retailers in particular are becoming extremely agile and adept at quickly reacting to customer behavior. You might get away with it this year, but in the same way that consumers are becoming insight-driven, retailers must do the same.
Channie Mize is the general manager for the retail sector for Periscope, a McKinsey Solution. She has over 15 years of retail experience spanning diverse competencies, including: omnichannel pricing and promotional strategy, clearance management, category management, analytics, and merchandise planning.
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