Barely 10 years ago, consumers were delighted with twice-yearly, end-of-season Sales. Fast-forward to today and there seems to be a never-ending cycle of price reductions – ever-earlier seasonal Sales, continuous ‘promos’, discounting disguised as loyalty programmes, Black Friday, Cyber Monday… the list goes on.
But the flipside is that retailers are struggling and many of our high streets are dying. Short-term blunt ‘discount matching’ to stay competitive has profoundly changed consumer behaviour. Retailers are realising they have trained existing customers to shop less profitably and a large proportion of digital marketing spend is directed at acquiring fickle, disloyal new customers.
However, discounting is not going to go away. So how can retailers regain control of it and begin to drive more sustainable, long-term, profitable growth?
SKU store-level trading
The short answer is they need to approach discounting in a much more precise and considered way. What if discounts were based on real-time inventory at store level?
If an individual product – say a size 10 red dress – has significant overstock in one store and is scarce in another, why use the blunt instrument of a blanket discount for all sizes in all stores? Why not instead take a much more surgical approach that trades the individual SKU according to its inventory and demand at the local level, at a specific moment?
All customers are not equal
Another dimension to consider would be SKU-customer-level promotions. Retailers should focus on retaining the existing valuable customers they know by rewarding them rather than chasing after (often) flighty new customers they don’t.
Today, the first-time shopper and the customer who has been loyal for years are treated the same. The lifetime value of the latter is so important to the retailer yet goes largely unrewarded as the drive for ‘new’ customers dominates marketing investment.
Flying lessons
It might sound radical to retailers, but differentiated and dynamic pricing for a specific SKU is already established practice in one prominent industry: travel. Airlines and hotels use yield management to dynamically price the same rooms and seats, for instance.
“Once the plane takes off, any seats remaining are gone forever. Retail, particularly ever-faster fashion, is not so different”
Furthermore, frequent flyer programmes enable individual customer-level pricing. For example, BA gives its most valued customers access to better prices by rewarding triple points to ‘Gold’ customers. This enables it to effectively use a money-plus-points price to give them a better deal.
A plane ticket is a perishable good. Once the plane takes off, any seats remaining are gone forever. Retail, particularly ever-faster fashion, is not so different. If an item has not sold within four or five weeks, it becomes effectively worthless. So, the principles of yield management increasingly apply to the retail fashion industry.
From blunt discounts to precision promotions
The reasons this has not yet happened in physical retail is the data complexity of dynamic pricing for an individual SKU at the store and customer level combined with the challenge of changing and presenting prices to consumers in a physical store.
Retailers need to combine logic about an individual customer (potential lifetime value, churn risk, next best message) with inventory and product logic (SKU-store availability) to determine what ‘price’ to deliver at a specific moment, in a specific store to a specific customer.
Of course, there are some positioning hurdles to overcome for shoppers to accept price variations. But loyalty programmes could be the ideal vehicle to deliver members’ prices or promotions.
Transformational economics
Why does this all matter? It comes down to those ever-thinner retail margins. Being able to vary the promotion of the same SKU across different stores to achieve an aggregated 1% increase in sell-through price can translate into a 5%-7% increase in operating margin for a typical fashion retailer.
Selling the same product for slightly more can transform the profitability of a retailer, and that’s something no retailer can afford to ignore.
So, what’s needed to achieve it? The first challenge is finding a way to elegantly deliver dynamic prices in-store. The second is managing individual SKUs across many stores and millions of customers, in real-time. That can only be powered by AI, with a data strategy that links SKU-level inventory and customer data – building a trading ‘brain’.
Complicated? Certainly. Possible? Of course. Worth the effort? Emphatically, yes.
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