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Personalized Pricing Could Help Solve the Markdown Problem

Retail hasn’t seen a markdown cycle that’s quite as vicious as the current one, and some experts are naming personalized pricing as a way to remedy it.

Last year will be remembered as the year of promotions, according to analytics software firm DynamicAction.

Forty-four percent of all retail orders sold on promotion in 2016, and 67 percent were sold using a markdown—and that all led to a 24 percent reduction in margin for North American retailers last year, according to the index.

One retailer that doesn’t seem to be suffering the same fate (and not surprisingly) is Amazon.

At a panel on trends in pricing and promotions at the NRF Big Show in New York Monday, Sahir Anand, VP of research for retail advisory firm EKN Research, said Amazon is ahead on price competitiveness.

When it comes to pricing, Anand said, “Overwhelmingly, retailers rank themselves on par with their competition. But when it comes to Amazon, retailers mark themselves much lower.”

Fifty-seven percent of retailers consider themselves to be behind Amazon in terms of price competitiveness, compared to just 5 percent who consider themselves to be behind their competition. Only 7 percent of retailers consider themselves more competitive than Amazon in pricing, and that number doubles to 14 percent when considering other competitors.

“What’s really come up in the last two years is customer segmented promotions, and that’s where Amazon has won,” Anand said. “That’s where the industry is headed in the next two to three years.”

In the next year, according to EKN Research, 55 percent of retailers plan to focus more on in-depth competitive pricing trends analysis, and 45 percent said they will use predictive analysis for pricing, promotion and markdown optimization.

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Based on EKN’s calculations, a $10 billion retailer could be leaving as much as $400 million on the table in lost sales opportunity because they’re not getting pricing right.

In order to get it right, according to Cheryl Sullivan, chief marketing and strategy officer of retail software company Revionics, retailers will have to leverage technology and data science to learn what certain shoppers will be willing to pay and come up with a systematic and automatic way to price right.

“You want to give your customers the opportunity to have a great price,” Sullivan said. “Consumers are very aware of certain products and they’re going to expect a certain price.”

Consumers have shifted everything in retail, their demands have increased, as has their knowledge.

“We’re going through some pretty massive changes in retail,” John Fleming, an independent consultant who spoke on the panel, said. “That ability to change your pricing with real time triggers in the marketplace is really the fuel that’s going to drive [it]…to be more demand driven than supply driven.”

Retailers can’t set and forget their pricing in today’s market, and knowing that, Revionics developed its Competitive Data & Insights tool, which emulates how consumers search for products to ensure relevant and accurate competitive price matching.

“We live in a day where you can’t get it wrong anymore and shoppers get offended and they’re not loyal like they used to be,” Sullivan said. “Personalization to date has been about product recommendations…but now it’s moving toward promotions at that segment level.”

Personalized pricing will have to become a lever to improve sales, according to Fleming.

“I think you start with segmentation,” he said. “If you start to move toward segmentation, you start to take groups and cohorts and look at things certain groups of customers are interested in….it’s personalization from a pricing perspective.”

Staying competitive in pricing is no longer just about who has the lowest price, it’s about giving consumers the right price and the right offer.

Personalization, according to Jennifer Loverude, VP of fashion at Infor, should really be happening at every stage of the consumer buying experience, and talk of personalizing at the pricing level is a good thing to think about right now.

“I think people, historically, have done personalization of pricing through targeted promotions…but I don’t think there’s a good idea of who is capitalizing on that, or it’s that the offer is being used so many times, you don’t even know who is using it,” Loverude said.

But finding a solution to pricing—which would ultimately help quell the spreading markdown virus—may be more necessary now than ever as consumers look for the same experience across all channels. When shoppers see lower prices online than what they find in stores, they’ll likely return the product. But what’s worse, the experience may change their perspective of that brand or that brand’s promise.

“There is an interest and a need for personalized pricing,” Loverude said. “I think it is an emerging trend.”