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Getting prices right is critical during recessions. Here are 6 considerations for setting prices during economic downturns, plus 4 pricing strategies.
Global inflation is at staggering heights with no end in sight, testing the margins of online retailers. As recession strikes, many businesses react with fear, slashing prices and discounting goods.
While discounts can be a short-term solution, they will ultimately hurt profitability and be unsustainable. Instead, here are 7 inflation-proof strategies online retailers can use to maximize profits and weather the storm.
Customers can buy items frequently or infrequently, and key-value items (KVI) are the former. KVIs have high price elasticity and sell often, usually comprising essential products for customers.
Consider grocery stores. A KVI for them is milk, priced relatively similarly across stores. If one grocer lowers the price of milk, customers take notice. Many will come to this store more consistently to buy milk and walk out with other items, too.
Identifying KVIs is critical during periods of high inflation. Lowering the prices of these items can help you reach more customers. Only raise the costs of these goods if you can account for that customer attrition elsewhere in your business.
Although lowering prices on key-value items may seem unintuitive, it can help you stand out and increase profits. It also helps customers perceive your brand more positively, which boosts loyalty and sales.
The competition among online retailers has never been more fierce. By the end of 2022, eCommerce will make up around 20.4% of global retail sales, up 10% from five years prior.
Increased competition means it’s harder to stand out. If customers are dissatisfied with your prices, they can shop around easily. That’s why you must stay knowledgeable of the pricing decisions your direct and indirect competitors make.
Ensure your prices are in line with competitors. If you want to price higher, communicate the additional value you offer. If you want to price lower, ensure customers know that quality and service won’t be sacrificed.
There comes a time when price increases are unavoidable amidst staggering inflation. The brand image you’ve built until that point is a significant factor in how customers will perceive those price increases.
Your brand image impacts the following:
Considering 59% of consumers prefer buying from brands they trust, and 21% mention purchasing a new product simply because a brand they like sells it, it’s essential to build a positive brand image. If your customers know and trust you, they’re more likely to stay loyal amidst price increases.
Here are some strategies for building a positive image:
It’s not what you say; it’s how you say it. This saying is true for price increases, too. Consumers are far more willing to accept price increases if they’re communicated with rationale and empathy.
Here’s how to best ensure price increases go over well.
Customers know inflation is staggeringly high; they’re feeling it, too. Instead of blaming inflation, offer more fresh reasoning.
If you plan to release new features, products, or offerings, discuss those and how they’ll boost your value add. If there is a more direct cause for price increases such as changing vendors, increased shipping costs, or anything else, mention those.
Proactively addressing price increases allows customers to prepare for them. Surprising them with a price increase seldom goes over well.
Prepare your messaging well in advance, and be ready to answer customer inquiries and concerns.
Be empathetic and transparent but not apologetic. Being strong in your convictions while relating to customers helps them trust that these increases are necessary. Doing so also builds authority for your brand.
Times of high inflation allow you to trim the fat of your product offerings and re-evaluate to meet changes in demand.
Customers are growing increasingly brand agnostic and seek retailers who can keep up with their shifting needs. Take a hard look at your product offerings compared to localized demand, and make changes where necessary.
From here, make informed inventory decisions and deliver product assortments that meet and exceed customer expectations.
Trimming the fat off your assortments means saving costs, so step one should be ceasing the production of your worst-selling items.
Promotions based on gut feelings or prior experience can lead to shocking profit losses. When inflation is high and the bottom line is strapped, re-evaluate all promotional strategies and ensure they’re based on data.
A famous McKinsey study showed that one lighting supplier received an invoice price of 32.8% lower than the list price, with off-invoice discounts resulting in pocket prices only half of the list prices. There’s no affording that during inflation!
AI and ML algorithms can help online retailers evaluate their baseline demand and account for sales, price elasticity, and inventory levels to assess profit. From here, determine what you can truly afford to discount.
Pricing strategy is a complex and relatively new field. When times are tough and it’s essential to maximize pricing, hire experts to lead the charge.
Identifying pricing leaders is tricky because experienced professionals are hard to find. Let Jennings Executive find these candidates for you. Our decades of industry experience mean we’re connected to various pricing leaders who can transform your company’s profitability. Learn more today!
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