Retail surgery: Rising commodity costs mean that we must put our prices up. How do we go about doing this?

Increases in the costs of cotton, wheat, shipping, overseas labour and business rates are putting upward pressure on prices. Retailers are now talking openly about price inflation in 2011, but is this the right response?

AlixPartners director Dan Murphy says that as this comes at a time of general inflation and shrinking disposable income, it might not be wise to advertise price rises quite so loudly especially as consumers are already feeling nervous about the impending VAT hike.

Instead, retailers can get much smarter about pricing, analysing elasticity across their categories. Murphy explains: “The smart money is on price optimisation. Retailers must really understand where certain prices are very sensitive to increases and others can be increased without affecting demand too much - for example premium or convenience products, white label, new products, multi-pack sizes, etc.”

He continues: “Many retailers apply standard mark-ups across the board, but there are ways of being more creative with margin architecture once they understand different customer sensitivities across the categories.”

He advises that retailers should avoid increasing the prices on their known value items as customers tend to compare the prices of such products across different retailers, often to the penny, and use these prices to form their view of a retailer’s value proposition.

Murphy concludes that he expects demand for sophisticated price analytics /optimisation tools to rise as retailers get smarter about their price and margin architecture.