Recession or not, tariffs or not, retailers will have to right-size their pricing if they hope to stay afloat amid ever-multiplying headwinds.
And the answer, according to new data in the Price Elasticity Report from First Insight, won’t lie in raising prices across the board in line with tariffs, or promising not to raise them at all, which seem to be the two camps retailers have found themselves in.
“Across-the-board price increases are risky, and blanket price cuts are generally suboptimal, leaving money on the table,” First Insight CEO Greg Petro told Sourcing Journal. “What’s needed is to understand which specific items or products can withstand a price increase, and which ones are in fact priced too high and need a price reduction.”
Digging into elasticity of demand across apparel categories (the more elastic a product is, the more demand for it changes as prices increase, meaning consumers view it as less of a necessity), First Insight found that price sensitivity is falling in women’s wear, men’s wear, children’s wear and home goods. That means there are areas there that could stand to see prices go up without consumers balking.
“Over time and across product categories, an average of 10 percent of the products tested through our solution could bear a higher price than what retailers or brands were planning, while decreasing other products’ initial price would maximize their revenue and margin,” Petro explained. “It’s critical to have granular, customer-driven data down to the specific product level to inform decisions that will optimize total sell-through and profitability.”
Women’s wear, according to First Insight, represents an opportunity for retailers to maintain or increase prices as shoppers “are becoming less concerned with price.”
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Retailers have already been raising prices in women’s wear subcategories, like handbags, swimwear, footwear and jewelry, but they’ve been lowering prices in sleepwear, outerwear, bottoms, tops, lingerie and dresses—and that’s where there are opportunities for price increases.
“Looking more granularly at a subcategory level, the historically elastic lounge/sleepwear category is plummeting in elasticity,” the report noted. “Rather than decreasing price when elasticity is falling, retailers have an opportunity to raise pieces.”
In men’s wear, prices could stand to rise, too.
As men take greater interest in their appearance and trends in fashion, elasticity is falling in the footwear, bottoms and underwear categories.
“Retailers saw the opportunity and took advantage of the underwear subcategory, which is a largely elastic category historically, and increased prices,” First Insight said. Outerwear is another category where they could do the same and benefit.
But it’s children’s wear that poses perhaps the biggest opportunity. According to the report, children’s wear represents the largest drop in elasticity of any category.
“Of the four categories, children’s wear does show the most significant opportunity to increase prices given the declining elasticity,” Petro noted. “That said, it is likely that elasticity will increase if the fears of a recession become a reality. In the face of economic instability, real-time consumer feedback on product preferences and willingness to pay becomes increasingly important so that retailers and brands are not blindsided by changes in consumer perception and behavior.”
If we are facing a recession, or even while consumers react to the idea of one, they may turn to spending more on home—and it’s a category where retailers have room to increase prices “moderately,” according to First Insight. Macy’s said in August that it tested price increases on furniture and housewares, finding that consumers largely didn’t “have much appetite” for the hikes, though other ills at the department store chain could be to blame for that.
According to First Insight, home décor buyers are the least concerned with price.
“With fears of a recession increasing, consumers are more likely to purchase lower-investment items such as home décor to refresh the look of their home instead of investing in a major renovation or a new home purchase,” Petro explained. “Economic uncertainty makes people less likely to make large purchases like new homes or major home renovations, but increases the frequency of purchasing smaller-ticket items to update the look and feel of a room without completely renovating it. In particular, décor items are a very cost-effective way to update on a budget.”