The Six Dos and Don'ts of Holiday Pricing and Promotions

Pricing and promotion

The 2020 holiday season is framed against the background of a vastly changed retail landscape and unpredictable shopper behaviors. While the pandemic-induced economic contraction made shoppers more price-sensitive and income-insecure than past generations, their shopping behaviors and promotional preferences have shifted radically as well. Amid lockdowns and waves of virus outbreaks, shoppers flocked online in record numbers. Meanwhile, the all-important items commonly referred to as Key Value Items (KVIs), which are those items that shoppers care most about and which disproportionately drive the overall price and brand image for a retailer, have radically transformed. Additional market turmoil comes from behemoths such as Amazon who have upended the traditional black Friday/Cyber Monday holiday cadence by setting Prime Day in mid-October, while other retailers leap on the early start bandwagon.

Against this bewildering 2020 holiday backdrop, there are some very clear dos and don'ts that retailers can integrate into their pricing and promotion strategies to be relevant in the COVID-dominated holiday season. To stand out with shoppers while protecting price image and exceeding financial targets, every retailer can benefit from adhering to the dos and don’ts.

  1. Don't guess at what price a shopper must see to be enticed and on which items. The one constant in the chaos is that price remains the single most important factor for shoppers in choosing where to shop, regardless of retail format, and determines how they feel about their overall shopping experience. Fortunately, price optimization science provides granular, real-time insights into shopper price sensitivity at the item level, and by channel, separating the demand signal from the noise to generate accurate price recommendations for retailers. Retailers, whether online or in-store, have only a few seconds to grab shoppers' attention on any given item, and if they don’t present the right price or promotional offer, they risk losing not only that item sale but the overall basket if the shopper goes elsewhere. Using price science that can model billions of possible pricing and promotional offer combinations and predict their outcomes, retailers can be automatically and dynamically presented with the optimal price or promotional offer. These prioritized recommendations are key to delivering the elusive win-win this holiday season: aggressive prices that align to shopper expectations on the items they care about most, while recovering margin elsewhere to sustain a healthy business.
  2. Do offer promotions that are relevant to shoppers' preferences. Unlike the consistency about the importance of price over all other factors influencing shopper experience, promotional preferences have changed noticeably in the COVID era. While traditionally shoppers preferred dollars-off or percent-off offers over Buy-one-get-one free (BOGO), a recent global shopper survey  found that pandemic-battered shoppers now have a clear preference for BOGO offers. Using promotion science to understand shoppers' promotional preferences, including channel, item, offer vehicle (e.g., flyer v. online coupon v. in-store endcap, etc.) and amount, is more important this year than ever. In fact, the same shopper study found that shoppers during COVID are more likely to wait for a promotional offer before making a purchase, and they predict that in the future they'll be even more insistent on awaiting an offer before buying – an increase from 34% pre-COVID to 45% in the future – so retailers absolutely must get it right.
  3. Do carefully craft and execute your private-label brand mix, pricing and promotions. Even as shoppers’ brand and retailer loyalty ebbs overall, shoppers reported a growth in their purchase of private label products, from 37% pre-COVID to 43% today. As shoppers increasingly use ecommerce as their primary channel, it's even more pronounced: 47% shop private label online. In contrast to shopper perceptions a few years ago of private label connoting inferior quality, shoppers during COVID are more open-minded about private label, because of price sensitivity and because supply chain and demand havoc often disrupted national brand availability. As shoppers discovered that store brands today often combine price competitiveness with quality equivalent to national brands, they are newly receptive to them. Retailers have an opportunity during the holidays to merchandise and price store brands aggressively and attract new shoppers on items generally drive attractive margins relative to national-brand counterparts.
  4. Don’t risk presenting shoppers with prices they might perceive as unfair or arbitrary. As supply chains whipsawed and demand gyrated, retailers faced dramatic cost swings that often found themselves manifesting in prices at the digital and physical shelf. For retailers who did not leverage price science to understand their shoppers' price expectations and tolerances, there was tremendous negative impact. During the pandemic, 74% of shoppers in the study reported that they had experienced unfair or arbitrary prices, which they often interpreted as price-gouging. They vote with their wallets: many report that they are unlikely or definitely not going to shop with that retailer again. As the holiday shopping season shifts into high gear, retailers who use science to give shoppers prices they trust and expect will stand to gain significantly. Moreover, the ability to see which items are the current KVIs as part of productized science enables retailers to focus on the items that matter most. There is reason to hope that restless homebound shoppers who have not spent their usual budget for family travel, summer camps, etc. may be in the mood to splurge on themselves and loved ones this season. Ensuring that in those few seconds of shopper attention, you present a relevant, engaging price, by item and channel, you not only earn the opportunity to make the sale but also avoid driving fickle shoppers into the waiting arms of competitors who do leverage price science.
  5. Build the optimal markdown plan.  The only certainty this holiday season is uncertainty itself.  As retailers struggle to get their holiday assortment right for the new pandemic-influenced shopper, it's more important than ever that retailers have a solid seasonal markdown plan built by science, delivering the precise cadence and depth of discounts to ensure they profitably clear their merchandise by the season end and capable of dynamically monitoring inventory and demand and adjust the plan systematically when the unexpected happens.
  6. Do maximize the use of vendor funding.  This holiday season, it’s important to maximize every trade fund penny, ensuring the deals presented and funded by vendor partners feed the right offer, properly align incentives, and the reconciliation process is seamless and speedy.  Too often these funds are applied to the wrong products, come with offer types misaligned with shoppers' expectations, have inaccurate forecasts, and fail to achieve the strategy of driving traffic and increasing overall basket sales. This season retailers cannot afford to simply let the vendor drive. It's time to apply deal management technology to start out on the right foot.   

As the widely predicted second wave of the pandemic accelerates while the holiday shopping season momentum builds, retailers face a balancing act, one that human guesswork and manual processes are not adequate to navigate successfully. Now more than ever, leveraging proven price and promotion science holds the key to prospering during the holiday season to deliver on the full-year business and financial targets.

Cheryl Sullivan is president of DemandTec.

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