How Retailers Can Make Excellent Pricing And Product Mix Decisions Amid Inflation 🎲

The retail industry is starting to bounce back as the economy reopens. According to the Australian Bureau of Statistics, turnover and volumes for retail businesses, including store and online sales, recently rose 12.5% compared to the same period last year. This is an encouraging figure, especially for those businesses that have faced massive losses during the height of the pandemic and economic restrictions. In line with this, we have also seen businesses trying to make the best of their pricing and product mix decisions.

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The problem is though, according to Deloitte Access Economics in its latest Quarterly Retail Forecasts, consumers are not really buying more. The increase in sales is solely due to price increases caused by inflation, which is not a sustainable way to secure and boost profits.

In this article, we will discuss how businesses can provide Australians impacted by the cost-of-living crisis with effective pricing and product mix decisions, as well as convenient shopping in a retail environment facing squeezed margins, rising business costs, and a consumer shift toward value purchases.

We argue that value-based pricing and product mix decisions will be the key to combating inflation. At Taylor Wells, we believe that retailers can still turn the high inflationary environment into an opportunity to gain market share. By the end, you will know to get your pricing and product mix in order to secure more profit margins.

What Is The Best Way To Make Pricing And Product Mix Decisions?  

An economic crisis doesn’t mean retailers can no longer expand and gain more market share. Here are some tips on how you get your pricing and product mix in order too when dealing with rising inflation:

1. Use leading economic indicators and multiple measures to predict inflationary influences before they hit

Businesses should make use of data to predict inflationary-influenced behaviour change. This includes when they choose lower-priced options, changes in where and what they shop for, and shifts in the frequency with which they purchase. It is best to avoid problems arising from the inability to deal with inflation. Data and competitive decision-making skills come in handy here.

2. Track profitability — cost, volume, mix, price — and be prepared to alter your strategy

As you keep track of inflationary indicators, monitor your business performance as well. This includes your profit performance, operational costs, sales volumes, product mix, and pricing. Be prepared to alter your strategies if sales volumes begin to fall. For example, targeted promotional strategies, focusing on promoting products that you know you can provide (stock on hand) and offering meaningful incentives on both best-selling essential and discretionary items when shoppers most need them.

3. Consider applying differential prices by category/product, customer group and channels 

A good way to drive sales is by targeting different customer groups in-store and e-commerce with unique offers by leveraging your shopper data and understanding price sensitivity. For example, we are seeing some companies revolutionise how they use individual data collected from each shopper. They make sure that they are selling their goods and services at the highest price they know a customer is willing to pay.

This basically means two customers who purchase the same item at the same time and under the same conditions may pay different amounts if one’s purchasing data indicates that they are willing to pay more.

4. Invest in your commercial capability

This will help you justify and future-proof higher prices with a value proposition. Look into assortment, consider pack changes, and don’t forget about budget-conscious consumers looking to trade down to smaller options.

Our findings show that when a business builds and embeds commercial capability across the company; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.

Discussion On Pricing Decisions And Product Mix Strategy In Marketing 

Inflation is at its highest in three decades and the Reserve Bank forecasting a 7.75% peak later this year. In Australia, the change in the Consumer Price Index is the most commonly used measure of inflation (CPI). According to June quarter data, the CPI increased by 6.1% year on year. Food price increases in vegetables, fruit, meals out, and takeaway foods are driving up the price of goods faster than services.

Price increases have a negative impact on customer perception and discretionary spending. The country’s solid pandemic recovery and domestic spending growth are now putting pressure on the economy’s ability to meet the demand for goods and services. With housing, fuel, and groceries comprising the majority of household expenses, experts expect that rising inflation will reduce demand for discretionary goods over essentials. Flash floods, labour shortages, and soaring freight costs are increasing manufacturer costs, which result in higher price levels.

Inflation increases the pressure on retailers who are attempting to optimise their prices and product mixes. Rising local and global supply chain costs are putting pressure on suppliers. Retailers, on the other hand, are concentrating on creating convincing prices in order to establish pricing trust. This signifies that assessing and addressing unproductive processes that are eroding profits is important.

Online shoppers, for example, necessitate shipping, fulfilment, possible returns, and customer service. To remain profitable, retailers must pass these costs on to the shopper. Cost-to-serve components are crucial for managing price and profit. However, as online retailers compete to stand out on value perceptions or promotions, they can be neglected. Retailers must maintain the balance between strategic pricing and having the right product mix.

Implications Of Excellent Pricing And Product Mix Decisions

It’s time to update pricing and product mix decisions and methodology. Businesses must keep an eye on global commodity markets for signs of cost inflation. Then, implement value-based approaches that are more appropriate and efficient.

Being on the back foot gives shorter lead times to prepare when inflation and recessions hit. Businesses need to think ahead and factor in leading economic indicators of cost and price inflation before they strike.

This entails monitoring inflation rates over time to assess the declining purchasing power of the dollar, and monitoring product price changes against consumer price indexes & business price indexes (many business prices are tracking below business and industry indices indicating that they are under-pricing/underselling their products or passing on too many costs onto their customers and losing them).

Price increases across the board are not advisable. Managers must re-evaluate the variable $ value of their products based on market and customer demand. Don’t just set percentage increases across your products without planning. If you do, you cannot expect positive returns.

You should also consider creating a pricing team to ensure that you have an effective pricing strategy that is tailored to and aligned with your products. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.

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Bottomline

In this article, we discussed how retailers can strengthen their commercial capability in the face of inflation by improving their product mix and setting reasonable prices. The truth is, the current inflationary environment can be an opportunity for businesses to gain market share. Keep in mind that strategic, value-based pricing can go a long way.

Grow your business while supporting your budget-conscious customers. Utilise revenue management levers to power pricing development and be straightforward about price changes and the reasons for them. Australian consumers regard both value and localism, but they will pay close attention to how each of your products is priced in comparison to category competitors. Take into account your platform strategy as well; promotions, shipping, and fulfilment can all have an impact on price-sensitive customers.

For a comprehensive view on maximising growth in your company, Download a complimentary whitepaper on How to Improve Product Pricing.

Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

Make your pricing world-class!