Retailing has traditionally focused on right product, right place, right time. We diligently manage costs and have developed ever more sophisticated solutions for managing and monitoring stock.
Amid this professionalism, one variable has been ignored: pricing, and the levers to optimise net achieved cash margin. With the internet we are now all feeling a little exposed.
Pricing opportunities and challenges are themselves becoming more complex. Differential pricing, competitor pricing, wholesale pricing, multi-jurisdiction pricing (pricing in currencies), temporary pricing (promos), and markdowns are all requiring more sophistication in strategies.
Our historic practices are fairly simplistic. We work by a fixed intake margin even though all products are not the same. Some have fashion risk, some do not. Some sell quickly, some slowly.
“Intake margin must always be 50%... If it is, we stock it, if it is not, we do not. Mess with that and you are on the road to ruin.”
However, a simple rule like that can reduce the total cash margin you can generate.
In the fashion businesses, we mark down at the end of the season, so why not do so as we go along? Why always 50% or 70%? A fashion retailer with £1bn of sales might forego 8% or 9% of revenue by markdowns - £80m is a big number. Yet we would rejoice when we save £1,000.
If price is wrong by 10% on 10% of lines, that equates to £10m. If markdown percentage is reduced by 1%, that is another £10m. If your own-brand percentage is over 40%, what a prize! If you allocate over 50% of intake to stores, the prize from local markdown is huge.
Two variables that add nearly 20% to profits and economic value should be priorities, but they are not.
Focusing on price appears to take us out of our comfort zone. Is this because we cannot intuitively understand what a right price is? Is it because we find it easier to multiply cost by 3? Or is that working out price elasticity or forecasting cash margin is just too difficult? It’s simpler with fixed margins to focus on sales and stock, yet it is cash margin which converts into profit and should be optimised.
Optimising price is the elephant in the room. We are scared that if we allow pricing into the equation, our ability to manage and forecast profit gets harder. But surely that is just about the tools we have.
In a 30,000-SKU business with a lack of proven tools, the complexity frightens us. Senior management fear anarchy if they relax simple rules of intake margin, yet they turn a blind eye to the markdowns that ensue.
We recently converted a Brazilian supermarketeer into a believer. Since taking the plunge, he has been saving more than 2% of gross margin.
We were able to convert him through providing the right tools.
Retailing is in a box. Volumes are static. All the key parameters are well managed. Costs have been micro-managed. Overseas sourcing is at an all-time high and we are now threatened by any weakness in sterling.
In the short term, we have few levers to pull.
Unfortunately whilst we have been asleep, our (online) competitors have been pricing their way to market share. More professionalism in pricing and in the allocation of promotional and clearance markdown is the last un-assailed frontier in retail: in the short term, a 2% prize can be the difference between joy and misery.
>> Read more about Price Optimisation