Chapter Five—Pricing and Promotions

The AlixPartners Retail Restart Playbook is a special weekly series of our Retail Viewpoint newsletter that provides in-depth answers and operational considerations for retailers as they reopen stores and restart business post COVID-19 closures.

Retail’s new normal is here, and it’s littered with uncertainty. There are urgent cash concerns made worse by unexpected expenses and unsold inventory, while future traffic and demand patterns remain unknown even as stores gradually reopen. While it may be tempting to launch deep discounts on leftover product from spring and summer collections, doing so indiscriminately can dilute gross profits even as other factors continue to erode margins. Instead, regaining control over your business will require a thoughtful approach to pricing and promotions.

There are several immediate conundrums with no easy solutions. Customers have shifted in large numbers to ecommerce channels, which have lower margins because of higher fulfillment costs. Many of these customers are expected to stick around and become permanent online shoppers—which means that finding ways to improve ecommerce margins is imperative. Strained supply chains may elongate the selling period for summer product. This means that too much promotional activity may backfire as you do not want to sell out of spring and summer inventory too quickly.

At the same time, pricing will remain a sensitive issue for customers over the coming months. With any missteps, the potential for permanent brand damage is high. Retailers must think carefully before making short-term moves that may shape longer-term perceptions and customer expectations. Pricing is a crucial and often overlooked lever that can help the overall business, but it requires a methodical approach that must balance risks with opportunities. Here are some suggestions to tactfully manage your pricing and promotions strategy:

Stop the margin leakage: The focus over the last two months was on serving the customer as best as you could with limited operations and levers. The next few weeks will be critical in taking control back over your metrics:

• Keep a close eye on traffic, topline performance, and margin by channel as consumer trends adjust over the next several weeks of reopening to determine how much room for maneuver you have. Continuously monitor the performance of promotions or clearances against expected time on offer.
• Reforecast margins weekly based on changes to consumer purchasing patterns by channel, which may fluctuate wildly in the near term, and continuously tune pricing to adjust for increased fulfillment costs or demand and supply imbalances.
• Determine whether you can transfer any spring or summer product to serve fall or back-to-school seasons, if needed.
• Use stores that may be closing permanently as a clearance channel for excess inventory beyond what’s currently within their physical four walls.
• Adopt targeted marketing or web design elements to recreate the brick-and-mortar impulse purchase path in ecommerce, encouraging customers to shift into higher margin products or increase units per transaction.
• Address the burden that ecommerce fulfillment places on profitability by incentivizing buy-online-pick-up-in-store options through targeted discounts that both provide value to customers and better economics to you than home delivery.

Turn the pause into a reset: This is the time to reset your overall promotional calendar and strategy, as modeling using last year’s performance will not yield the right answer right now:

• Refresh your pricing tools and price ladders because historical consumer responses to pricing and promotions are likely unreliable now. You may need to lower the number and depth of major promotions where possible. In relevant product categories, recapture supplier funding through other mechanisms such as list-price reductions or customer-specific offers.
• Rebalance spend across different types of offers, possibly away from in-store or sitewide percentage-off plans to tiered or basket-stretching promotions. Focus promotions on traffic-driving items and categories based on season and look carefully at individual targeted offers, for example, encouraging key segments to return to the store.
• Reconsider whether you need price parity across channels. In some categories, lower in-store pricing may incentivize customers to come to stores where they may have larger and more profitable transactions. Customers may be more accepting of different prices across channels right now because these variations will likely be prevalent everywhere as all retailers work to get margins back in line with elevated ecommerce penetration.
• Study broader consumer shifts carefully and critically assess actions and business performance to move faster than competitors and learn from others’ mistakes.
• Deploy specialized messaging, new color palettes, and mechanics you have not used before and won’t use again to insulate your brand from long-term impacts of any major, one-off pricing actions.

Put pricing in the front seat: Use this as an opportunity to assess the role of pricing in your overall business. This is the time to have strategy-setting debates on pricing that weigh the pros and cons of old as well as new approaches:

• Return pricing to the heart of your business plan. It can’t just be a rollup of SKU-level actions or a well-worn seasonal promotional calendar that is executed deep within the organization. Senior leadership needs to set new a pricing framework for category and execution teams to align against.
• Ensure that your pricing and planning teams are thinking strategically, acting quickly, and reevaluating continuously. Because it is hard to predict upcoming inventory overhangs, out-of-stocks, supply chain hiccups, etc., ongoing planning is the only way to minimize costly mistakes and find hidden opportunities.

Pricing is an often-neglected lever, but it is also very easy to get these tactics wrong. This is an especially critical time to reassess your normal pricing cadence and strategies to avoid potentially costly mistakes that may undermine your business or put off customers permanently. Next week, we will focus on how to better monitor consumer behavior and use these real-time insights to make significant decisions.