How to Lower Prices and Increase Profits

When shopping, getting great value for your purchase is only great when you have money to spend. When money is tight, you seek low prices, not value.

A $500 baseball bat, 50% off, is still a whopping $250 for a baseball bat. A $7.50 latte and $6.50 sandwich that doubles my reward points is $14 out of my pocket. And $1 off per pound of a $9.99 organic chicken breast is still $4 more than the $4.99 per pound of the non-organic version. It’s good value, but it’s still a luxury decision.

Stressed shoppers are seeking lower prices, especially for their essentials, and they are shopping at a record number of stores to find them.

Retailers have to deal with the impact of higher costs, too. But how can you compete when your shoppers are revolting, and the most prominent retailers constantly announce price cuts across thousands of items?

To further complicate the matter, CPG companies are reporting softer sales and announcing price cuts and new promotions. Nestlé, having repeatedly raised prices during higher prices, indicated it would offer more discounts and cut prices to attract shoppers to its products. So when shoppers hear this, they come into stores expecting lower prices immediately.

Announcing price cuts has been a trend for some time. In August, Walmart announced rollbacks for 7,200 products. Not to be outdone, Target specified it had cut prices in May across 5,000 items only to recently cut prices across 2,000 more in preparation for holiday shopping.

However, both companies have pricing power, private label brands, and the ability to pressure their vendors. Target saw record profits, the equivalent of 11 years of growth in one year, during the pandemic. Vendors tend to fund Walmart’s rollbacks that get passed to consumers. Most retailers don’t have this luxury.

Major retailers have also heavily invested in technology and data science. They don’t make thoughtless broad-based cuts; they analyze their customers, competitors, and local markets to determine where they will benefit from their investment.

Retailers must compete above their weight in this market. They can’t take the simple approach of price matching; they will lose—as history has shown during Walmart’s rapid expansion across America in the 1990s and 2000s. Increasing promotion depth and frequency can drive traffic and volume, but it will be costly and financially draining if you make the wrong decisions. Bad decisions are wasteful and lead to a downward cycle of less profit, lackluster sales, cost-cutting, and a diminished brand.

However, a tool often seen as only available to the largest retailers can provide the answer to lower prices: Price and Promotion Optimization. Guided by your strategy, these solutions maximize profitability, competitiveness, and customer loyalty. Below are several ways in which this is accomplished.

Data-Driven Decisions

Price optimization leverages historical sales data, market trends, customer behavior, and competitor pricing to recommend price reductions. This approach ensures decisions are not made based on guesswork but on data.

Maximize Profit Margins

Lowering prices across the board unnecessarily erodes profits. Optimization identifies the specific products and stores where price reductions will increase sales without significantly hurting margins, allowing you to lower prices where it makes sense.

Customer Segmentation

Price and promotion optimization can reveal how specific customer segments respond to different products and offers. You can target each group with personalized promotions and top line offers to bring them into the store or increase their likelihood of buying.

Respond to Competitor Pricing

Optimization algorithms factor in competitor pricing, sharing where you might be too high and allowing you to respond quickly. More advanced optimization engines will show you the cost of compliance with those rules to determine if you should soften them.

Promotion Effectiveness

Promoting the wrong items at the wrong time, with ineffective discounts, is often a problem. Promotion optimization tracks which discounts or offers yield the best return on investment and highlights alternatives.

Reduce Overstock and Shortage

Not having the proper amount of stock when needed is a common mistake that ruins any promotion. Accurate promotion forecasts for the promoted item, along with substitute, halo, and cannibalized items, alleviate this issue.

Enhance Customer Loyalty

Solid pricing strategies offer additional value to customers, creating loyalty and return visits. Poor pricing strategies exploit your customers for profits, giving you a short-term bump but eroding long-term growth. Advanced price and promotion optimization drives repeat, long-term customer loyalty, especially in ultra-competitive markets, through solid pricing strategies – and highlights the consequences of poor pricing strategies.

Adapt to Market Conditions

Markets fluctuate based on seasons, demand, competition, or macroeconomic factors. Optimization brings agility, enabling you to lower prices in specific markets in anticipation of potential market changes.

Improve Brand Perception

Your prices say a lot about your brand. What are your prices saying? Price optimization ensures that any prices are tied to the company goal and category role, which creates consistency in your brand perception.

Even though it is easing, inflation will still be a huge problem. Food inflation has risen 22% since 2021. Eggs are up 87%. Auto insurance exploded by over 47%, and the housing market is on track to sell the fewest units since 1995. For a reference point, the US population had 76 million fewer people in 1995.

When your customers feel the pinch and the big players are making headlines with their price drops, it’s easy to feel the pressure. However, with pricing and promotion optimization, you can intelligently respond, stay ahead of the competition, and make every customer visit count with impactful impressions with your prices.

Mark Schwans