At The Bottom Of Retail Pricing Holes | Forbes

I’ve covered pricing in retail for a long time, almost since the advent of the price optimization techniques that are now ante to the margin game in retail. And while it’s getting a bit old to talk about the impact of the Great Recession on retail, one of the lingering effects has been retailer reliance on promotions to get consumers to buy. Retailers had to discount heavily to make it through the consumer spending freeze of the economic downturn, and consumers happen to like those discounts so much, it’s really hard to stop.

Mostly, the heartburn I see is around the idea that it’s all or nothing. You either discount or you don’t. You either offer mass discounts on everything, or you try to hold on to everyday low pricing for as long as you can. Some retailers have tried to move to more personalized promotions, and certainly a lot of the personalization craze is driven by the idea that maybe retailers can overall promote less by targeting specific promotions to specific groups of people, or even individuals. For an individual, they still perceive that the retailer is promoting heavily, but the net effect of the totality of promotions is that the retailer is overall promoting less.

As I said, I’ve been around pricing in retail for a long time, but I’ve never seen analysis like what I’m going to walk through next. Credit where credit is due, this analysis was presented by Justin Sargeant, the CEO of Nielsen Pacific, at the Australian Food & Grocery Council’s conference in Melbourne. It’s dead simple, but like I said, a way of looking at promotions that I’d never seen before. I should also note that if you thought the US retail market over promotes, it’s got nothing on the Australian market. In grocery, price wars turned into, literally, wholesale slaughter. To the point where when they talk about “rational pricing” they mean it. Like offering 50% off cough syrup is going to somehow stimulate demand for it.

So here’s how Nielsen recommends looking at it. Every item out there has two elasticities – basically, how much the price of the item can impact demand. Economics 101: the demand for gasoline is not very elastic. If you need gas, you need gas. Gas stations can possibly move demand around within the market, and consumers love to feel like they’re saving money on gas, but the reality is, if the price of gas is high everywhere, consumers are still going to buy it. The first elasticity is that of the base price. If gas is priced high everywhere, the non-promoted or base price elasticity is low.

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At The Bottom Of Retail Pricing Holes.