Over the past several weeks, I have spoken to a number of CEOs regarding what is arguably the most challenging aspect of the retail business: Pricing.
Regardless of their experience or perspective – specialty /vertically integrated retail, department store retail or brand manufacturing, the common concern is avoiding the “race to the bottom” on pricing. These retail CEOs all agree that a poorly executed pricing strategy can make the difference between success and failure. The time is right for new, innovative and more precise methods to determine optimal pricing.
During our panel discussion at the NRF conference in New York this year, Matthew E. Rubel, former CEO of Collective Brands and Cole Haan, now with private equity firm TPG Capital, stated: “The model that has been in place over many years was that you would look at your competitive set, and your distribution, understand the product category that you want to be in, understand what you can buy the goods for, and strive for a certain mark-up in aggregate. That’s pretty much old school.”
So what does Rubel think retailers need to do moving forward? He stated: “New tools which will help you set the right price up front… to me is the wave of the future that we have to get on with.”
While speaking at the WWD Apparel & Retail CEO Summit earlier in January, Mickey Drexler made a critical point: “The real price of goods is always the selling price. The best price is to sell it for what it’s worth.” Drexler’s statement is right in line with Matt Rubel’s perspective. The results of “old school” pricing methods are already known – hyper-promotions, markdowns and clearance pricing. – a “race to the bottom.”
With pricing such an important factor in retail organizations, one must ask: “who owns it?” Nikki Baird, Managing Director of RSR Research, reported some of the results of RSR’s 2012 Benchmark Report on Pricing during the panel discussion. RSR found that a full 67% of “laggards” (poorer performing retailers) say pricing is managed by the buyer. Conversely, “winning” retailers are creating a separate pricing function and investing in tools to better manage the process.
Offering further insight, Baird stated: “Retailers have an opportunity, with more tools available than ever before, to make better decisions. It’s just a question of everybody starting to use them.”
So how do retailers avoid the “race to the bottom”?
Mindy Meads, Wet Seal Board Director, former co-CEO of Aeropostale and previous CEO of Lands’ End, believes product differentiation is one way to avoid the race to the bottom. She stated: “You have to know your customer, who is that customer, you really have to understand who they are and what they are looking for.”
Mark Cohen, Professor at Columbia University GSB and former CEO of Sears Canada, Lazarus and Bradlees, agrees with Ms. Meads about the importance of the customer. “There are no retailers in the world who have ever succeeded who have disregarded the behavior of customers and the presence of competition.”
How can retailers know what the product is really worth, and what the selling price should be?
Greg Girard, program director for merchandising, marketing, and retail analytics at IDC Retail Insights, addressed this issue: “Avoiding the effect any race to the bottom on price has on revenue, margin, and unit sales erosion requires bringing the right products to market and setting their initial price right. These dynamics now put a premium on predictive analytics that complement merchant judgment."
In the end, I believe brands and retailers can avoid the race to the bottom in three ways:
- Identifying their brand/product differentiation and sticking with it.
- Understanding the customer “value quotient” – the combination of product desirability and price at which the customer will buy.
- Setting and maintaining prices based on this value quotient, with 100% authenticity and transparency to the consumer.
As many of you know, at First Insight, we offer a solution which enables retailers to identify this value quotient. By applying predictive analytics to real-time consumer data, we help retailers and brands understand the price elasticity of a new product, months before it is launched. We also provide an accurate forecast of the full lifecycle AUR of a new product, as early as the design stage. This is helping designers and merchants make decisions on whether or not to move forward with a new product, and how to establish the promotional approach when the product is introduced.
The goal of retail is to sell more goods at full price, and 2013 will be a critical year which I believe will separate the winners from the losers. I look forward to your input and to helping you address the challenges you face moving forward.
According to a recent NRF survey, shoplifting also known as “five finger discount” or shrinkage is on the rise. The retail value of lost merchandise is cost retailers $37 billion in 2010, up from $33.5 billion in 2009. Typically, an increase in shoplifting is an indicator of tough economic times but the recent spike in stealing could very well mean the economy is on the upswing.
When the economy was at its lowest point, many employees were concerned about job security. “They were so worried about their future, their families and paying the mortgage, they realized that their jobs are keeping their family afloat,” said Richard Hollinger, a criminology professor at the University of Florida and author of the security survey. They were less likely to shoplift and take the risk of loosing their jobs.
However, as our economy begins to recover, shoplifting begins to rise. According to Jim Angel, associate professor of finance at the McDonough School of Business at Georgetown University, “…many employees feel more secure in their positions, and are more inclined to take risks.” Employees may be more tempted to shoplift if they feel the company can afford it and they are only being paid minimum wage.
Unfortunately, shoplifting and employee theft is something that every retailer faces. Preventing employee theft is a constant challenge for retailers. Loss prevention systems are often used to reduce the opportunity and motivation of employee theft. To read more about the rise of shoplifting please visit http://cnnmon.ie/mIoD6v.
Yesterday, Women’s Wear Daily ran an article, “Retail’s Technological Revolution Takes Off” (WWD password required), that focuses on how Web 2.0 and technology are shaping the retail industry.
I think it’s safe to say, that for the most part, those in the retail industry typically aren’t early adopters of technology. However, retail innovators like Zappos have been tapping into the power of the Internet and social media to maintain an intuitive, customer-centric business model. Now, many retailers are beginning to recognize the value in cloud computing, social media and mobile business- just to name a few of the initiatives highlighted in the article.
Follow the link to read more about who’s impacting the way retailers will buy and design in 2010. And note, under NRF’s innovators, First Insight’s gaming technologies happen to mentioned as an innovative way to harvest data from consumers. Which of course is just an added benefit to this great piece…
The NRF’s BIG Show was an exciting place to be this year. In case you missed it, the NRF decided to do something a little different this year with the Innovation Station on the EXPO show floor. The Station focused on 13 solution providers addressing issues facing retailers today. My personal favorite was a technology from richrelevance called Fashionista: a new technology that let’s consumers try on clothes virtually using their web-cams.
The booth also played videos of interviews with C-level executives, and let attendees vote via text on the challenges they see as most important. Video of these interviews can now be found on YouTube:
While the technologies in the Innovation Station were exciting and new, there were many outside of the pavilion that were interesting. Unfortunately for me, there wasn’t enough time in the day to visit all of the booths that I wanted to. RIS News made a Top 10 list of “Things You Missed at The NRF Big Show 2010.” Of course, the list could have been a lot longer.
Today, the NRF Blog posted, “Get the inside scoop on what’s hot in retail.” On the list was a white paper entitled, “Winning at Consumer Centricity: 10 Tips for Retailers and Manufacturers.” Reading this, I thought Tip #2 resonated really well, “Collecting consumer insights is only half the battle.” It’s great to see the statistic that 67% of businesses are using insights to drive decisions, but less than half (47%) are using the insights to inform activities like demand planning/forecasting. The paper continues to say that the biggest challenge for retailers is bridging the gap between developing the consumer insight and actually executing consumer-centric strategies across the organization.
Overall, it seems as though retailers, and manufacturers, are starting to realize the importance of listening to their customers, but still lack the tools to use the gathered information efficiently across the organization. Without this ability, the data is of far less use than its potential.