#3 - Pricing trends in Central & Eastern Europe: challenges & opportunities

In this article, which is a result of a podcast conversation I had with Tomasz Stec , we are focusing on trends, underlying factors and business opportunities related to pricing and revenue management in Central & Eastern Europe. In the past years various events impacted businesses in Eastern Europe: pandemic period, high inflation, the war in Ukraine among them.

?Three factors might be relevant to consider:

1.Pressure on margins.

That can be described as pressure from both sides, from the consumer, customer perspective, but also from the cost side. So, the margins are shrinking from two dimensions: competition is price aggressive, and costs are constantly going up (e.g. electricity, raw materials)

2.Changes in the customer behavior.

In many markets we see a polarization of customer groups. We observed that the sales of luxury products still go up. We might think that many people still can afford to buy luxury products. On the other hand, plenty of customers became even more price elastic.?This polarization of customer segments can lead to the middle sector somehow shrinking.

3.Technological revolution.

AI gained a lot of general awareness among managers, and everyone is interested how to increase effectiveness of their business via digital solutions, tools and with the support of AI.

There are differences related to what can be seen in Central & Eastern Europe and Western Europe. First, in the CEE region, customers were always more price sensitive than in other regions in Europe. This means that price was relatively more important when considering the offer. It has some correlation to the general wealth of our societies. It has some correlation to the wages and salaries, average wages and salaries in our region comparing to other regions. Clients and customers in CEE, always liked promotions and buying something with the discount is always very appealing to us.

After the past events in recent years, it became even more crucial for a couple of reasons:

-?Customer budgets shrunk because every household's cost of energy, cost of electricity has gone up. General inflation also caused that budgets are smaller.

-?Higher consideration has been placed on buying and spending, even on the daily groceries. And this makes running a business nowadays even more difficult with such high price sensitivity.

-?Competition is not sleeping. And everyone starts to bring the customers, generate traffic, increase sales via the best offer. Some managers decide that the price is the best way to fight for the customers. So, they have very aggressive pricing strategies, what brings challenge for businesses.

The changing relation to pricing & revenue management

There is also a positioning related to how managers look at pricing strategy. In the past, they believed that they need to have like a long-term strategy. During the pandemic, the customer journey and the customer preferences changed a lot. So, businesses started to do a lot of manual tactical changes also in pricing. At some point in time the most important categories became less important and some categories which were out of sight for the customers became super important.? Managers somehow discovered or learned that doing these tactics is even more important for the business, is even more important for survival, more important to generate higher sales what brought some of them to the conclusion that such tactics is less important than strategy nowadays. For long-term profitability the key is defining the strategy, also in pricing, while paying attention to short-term market turbulences. This is what will ensure businesses continuing profitability.

Strategy. Strategy. Strategy

To be profitable in the long term, companies need to define the strategy also in a commercial space, also in pricing. Businesses need to have a proper pricing strategy to which they will stick in the long term.

And coming back to pressure on margin, consumer behavior, technological advancement, the situation varied over the countries 15 years ago. For those businesses which didn’t encounter high inflation in 2008, this is a new situation. Including that for many years, even in CEE, countries experienced low inflation. And suddenly everyone discovered that what inflation really means

It was a different period before the pandemic. The customer base was stable. Pricing wasn’t something that managers put a lot of attention daily. If the setup is proper, the processes could be run in a relatively slow pace. But, suddenly with all these changes, companies had to react and adapt very quickly. Companies could not stick to old processes and had to adapt very quickly. This kind of crises and this kind of like a disruption on the market, like a negative disruption has always many, many factors in common. The shrinking customer base, high inflation, also on the cost side. Not everyone was ready for that and had manual adjust. And thus, the need to adapt the revenue management processes. Adapting pricing tools is required to make sure that in these higher dynamics market, companies still generate profit. This was the challenge for some managers, but it was also a possibility to gain competitive advantage, bringing pricing in revenue management on a higher level.

A more data-driven approach to pricing

This is true also for entrepreneurial companies that are now growing. More professional revenue management processes, better pricing organization, more advanced tools will help them to increase efficiency and generate higher profits. In the long term, investment in revenue management always pays off, but what is needed in the beginning is a clear definition of the pricing strategy. Awareness in the team is a must, as well as creating a revenue management team. In Simon Kucher we are always saying?that software follows strategy. We believe that buying a software product from the shelf will not simply solve all problems in the business due to low advancement and low knowledge in pricing . Everything starts with the team that must be aware that price is one of the most important profit levers.? Businesses need to have good understanding of pricing mechanics, pricing concepts, and need to build proper processes, also considering the use of data. And then as a last element is the tool which will help to adjust and manage prices quicker in a more efficient way. ?

A very important question is related to the quality of data and how quickly can companies update data to make better pricing decisions.

For example, many companies say they need to be competitive and look at the prices of the competition. They also say they cannot deviate too much from the market price. And then we ask them how does the price monitoring process look like? We are surprised when they say that once per year they gather some information about the competition. Or some companies, they monitor a lot of prices on the market, but they just store this information very often in not very systematic manner that cannot be analyzed in the long term.?

?So, starting from the data used for the pricing decisions, even in a competitive prices analysis, there is a lot of potential to improve.

The rise of proximity stores

When it comes to innovation in pricing in Central & Eastern Europe, many companies really want to test, want to innovate also in this revenue management area and successfully introduce new digital solutions. Also, the business models are evolving in various ways, depending on the business format. Depending on the general brand positioning, but also price positioning, different clients going there. The is one general trend in our region that customers, those who can afford, they really value their time. And that's why this proximity concept or on the go, whenever thinking about like coffee or ?

fast food, QSR (Quick Service Restaurants), or thinking about the grocery chains, these concepts gain popularity. In the past, a possible typical entertainment for Romanian or Polish families was going to hypermarket or mall on Saturday and do big shopping and spend some hours. Now we value our time with families more and we do not want to spend so much time on shopping. We somehow switching from going quite often to hypermarkets to buying online, which is also attractive alternative. And for the small purchases, small baskets, very often we prefer to do it quickly at the proximity formats. Many players, even international players are entering Romania. The traditional players are thinking also how to expand from the classic hypermarkets to the proximity formats. In proximity formats we find?different pricing, which is convenient for customers in terms of time gain.

What characterizes retail in CEE is still a high percentage of traditional trade. And by this, we are more like South America retail rather than to Western retail, which was already many years ago, highly concentrated and the biggest players on the market were discounters or hypermarkets.

Because of changes of the preferences of customers and our focus on really valuing our time versus the money we spend; we believe in the future part of the customers will be willing to spend more and more in such concepts and they are already willing to pay higher prices for that.

Sustainability and willingness to pay

On the other side, there is a focus on sustainability. There is a higher and higher desire for sustainable products. Companies are trying to balance this need for bringing sustainable products, but on the other side, staying competitive & profitable. In some industries, the regulatory changes expect some businesses to adapt quicker. But in some businesses, we think that sustainability will not bring any competitive advantage. Many businesses still think that they need to comply with some rules, but this is just additional cost imposed by some government bodies on us. This is where some potential can be missed because the clients expect that the products they buy, the services they use should be more sustainable. And we can think about many ways of being sustainable - environmental and social sustainability. So how the offer and the business we are doing impacts the whole society, our workers, our clients and so on.?This trend exists, especially among younger generations, who expect that the current offer and even offer in the future will be more sustainable. But there is a very interesting question. Are they willing to pay more for that? And very often customers expect that the offer should be sustainable. for the same price, which becomes challenging for companies.

How can they manage this? This is not surprising, but the changes we need to introduce in businesses to become more sustainable, they generate some additional cost very often. And then, of course, once again, a higher pressure on the margins from the cost side.

So probably if companies just passively introduce and become more sustainable without a plan, and just pick a couple of activities to comply with the regulations, and also to be more appealing to customers, then they might lose some margin.

To make it successfully, companies need a plan to properly transition towards more sustainable business. This includes also an analysis of what kind of additional costs it can generate and what elements are top priority for clients,

Next years

?We will observe that some pricing concepts and some pricing mechanics will be more broadly applied in various industries. To give some examples, many years ago, some of us were maybe somehow frustrated about dynamic pricing of plane tickets. Now customers are getting used to this. The same with ridesharing platforms. We wouldn’t have accepted dynamic pricing with taxis. Now we have some pricing concepts in some industries, and we treat them naturally.

?But the question is, would customers accept dynamic pricing in the grocery store? Electronic price tags are becoming more and more popular, and more and more companies are testing that. Would customers accept that they enter the shop, and they see prices and that might change during their visit in the shop?

Some topics to further explore and will be seen more often in the future: dynamic pricing, dynamic margin differentiation, bigger margin differentiation between point of sales, between time, between geographies, customer groups, loyalty programs.

?We can expect that in the future, in more and more industries, prices will become more dynamic and more individualized. And when companies want to have more dynamic pricing, this is where AI becomes helpful. To make such changes,? the team itself may not be sufficient. Companies will need to support growth with more advanced analytics, AI or machine learning solutions.

P.S. Hope you enjoyed this edition of my new Linkedin newsletter "Pricing & Revenue Analysis". Don't forget to subscribe to stay updated with next editions.