Since the COVID-19 pandemic started, retailers have faced a pace of change in consumer behavior that is unprecedented. As public health restrictions begin to ease, retailers cannot be fully confident of what the new normal will be, but it is clear that margins will increasingly be squeezed, and competition will become even more intense. The shift to online channels has been far less profitable for retailers, and industries like restaurants and entertainment who are recovering from the impact of the pandemic, will recapture their share of customers. Leading retailers are moving quickly to AI and advanced analytics to help them in all areas of their business, including pricing for improved profit.
Most pricing analytical technologies make a crucial omission when it comes to evaluating and recommending prices for merchants, and that is to focus on price first and focusing little, if at all, on determining the right combination of items to begin with. Optimizing the item mix has long been overlooked by pricing technologies, but it is critical to compete. This is because, in the majority of instances, the item needs of a customer is the most important reason for buying, and pricing provides additional incentive. Get the item mix right, and the pricing falls in to place.
How the proper item combination drives successful pricing
The proper item combination achieves two critical things that drives successful pricing:
- Firstly, it significantly extends the reach of promotions by determining the combination of items that will connect with the largest number of customer segments and their item needs. As an example, the front page of a digital advertisement or a paper circular may have five items on promotion. These items should ideally reach five customer segments rather than being five deals for one segment of customers. The promotional prices will then function to further incentivize the five customer segments to make the trip to the retailer’s store or go on to their site.
- Secondly, and as important as reaching more customers, an item first approach will deliver the combination of items that provides the greatest positive Halo sales impact across the store’s assortment. The Halo sales impact is similar to the idea of associated sales, but takes that concept much further to mathematically consider, not only the millions of associated sales, but take into account such things as cannibalization, pantry loading, seasonality and price points. Maximizing the Halo Effect by selecting the right mix of items is key to building bigger baskets, driving sales, and recouping margin.
Once the promotional item mix is established as a first step, a combination of items where both the reach and Halo impact has been optimized, merchants are in a much better position to price for more profit and sales. The straightforward strategy is for high impact item price points to be reduced significantly to drive traffic. The items that are associated with the high impact items are not promoted at all, as their sales will go up as a direct result of the high impact items being promoted. The prices of the associated items typically remain at their regular price or are even increased slightly to make up for the margin loss on the high impact item. If the retailer is Everyday Low Price (EDLP) or Hi/Low, they will typically have to do many fewer, but more powerful, promotions by getting the item mix right as a first step.
Undertaking the deep analysis required to produce the right item mix for every promotion a merchant prepares over the year is a significant challenge and impossible to do manually, but it is an unquestionably essential step as the world gets past the pandemic and retailers enter a much more competitive landscape. AI analytics and process automation is where leading retailers are quickly moving to give them the ability to consider millions of variables in milliseconds, creating the optimum item mix scenario based on their strategies, and from there, provide the right price points for driving sales and margin.