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How to maximize margins during sales season and avoid high markdowns

Business

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03 June 2021

According to recent studies, the fashion industry’s economic profit alone decreased by 93% in 2020 after rising 4% in 2019, as a result of the pandemic. The same research states that between 20,000 and 25,000 stores closed in the US alone in 2020, mostly in shopping centers.

The impact wasn’t felt only by small businesses. Large companies such as GAP, Victoria’s Secret, Guess and Michael Kors closed stores permanently, while others are announcing they will do the same too. For example, Inditex announced in June 2020 that it will be closing between 1,000 and 1,200 stores worldwide over the next couple of years.

However, the outburst of the pandemic wasn’t the only factor that influenced the retail sector in the past years. The unpredictable trends that cause significant changes in customer consumption patterns and the growing number of competitors both locally and globally, are just some of the challenges that retailers have had in the past few years that have put pressure on them to adapt and react in a more agile way than ever before. Such challenges impact many areas of the business but one in particular is becoming increasingly more complex due to technological advancements that are affecting the value chain and the unforeseeable change of habits, and that is how to protect margins during the sales season.

 

What are the main challenges of the sales season?

First of all, during the discount period, products that have a short lifetime cycle such as consumer electronics or fashion items, have a high impact on sales in two ways: restricting the direct sale of certain products and blocking the entry of new ones. Therefore, the lifetime of products and minimizing the risk of their impact on margins, should be priorities in the development of any strategy for increasing profitability.

Second of all, the vast number of unforeseen events that can impact the rotation of products and consequently, the volume of stocks, such a commercial campaign launched by a competitor, unpredictable situations that change consumer behavior or pessimistic perceptions of the future. Whatever the trigger might be, it affects sales and allocated stocks.

 

Main strategies to maintain margins during the season

There are several tactics to reduce unplanned erosion of the margin that can be grouped into two broad groups:

 

  • Stock management: actions aimed at ensuring the availability of products at the points of sale with the highest probability of being sold. Within this group we have: product allocation to stores and transfer between stores.
  • Price management: actions aimed at optimizing the profitability of the available stock during the entire pending life cycle. Under this grouping are the generation of personalized offers and discount campaigns.

 

Another characteristic that defines these initiatives are the degree to which they are customer oriented. While store reserves and, above all, personalized offers, are based on a deep understanding of the customer, their motivations and consumption patterns, the transfer actions and massive discount campaigns do not consider the customer's perspective for their execution. 

The value of dynamic pricing in protecting the in-season margin and when we can apply it

Dynamic pricing has traditionally been associated with the tourism and leisure sectors, in which the price of the product is set according to the evolution of demand against a limited offer.

In the retail industry, dynamic pricing is associated with the e-commerce channel, the perfect example being large online stores that update the price of their products sometimes even every few minutes. If dynamic pricing had to be defined in the context of retail, it could be said that it is the ability to adjust the price of products in a personalized, permanent and immediate way, with the aim of maximizing financial or customer engagement results.

There are 2 main situations in which applying dynamic pricing will protect margins: personalized offers and sales.

 

Dynamic pricing for the generation of personalized offers

Before lowering prices, we advise retailers to design a campaign of personalized offers based on the preferences of their customers. A properly designed and executed price campaign can not only maximize the profitability of the stocks but it can also help maintain or reinforce brand value.

Setting an attractive price for each customer segment is one of the most effective and high value strategies when developing a campaign, together with 2x1 promotions, packs or offering extra points on loyalty cards.

 

Dynamic pricing for sales prices

Unpredicted events put an excessive pressure on the commercial area to set a price that ensures the exit of the stock with the least impact on profitability. The challenge here is, and always has been, how to calculate the right price considering both the risk and profitability of the turnover of the stock volume in the defined periods of its consumption. The solution is dynamic pricing for sales.

However, before considering implementing a dynamic price initiative, whether with the goal of protecting margins in-season caused by an unexpected low turnover products or to manage products with risk of unavailability, the following key success factors should be considered:

 

  • Advanced analytics: Artificial Intelligence, Machine Learning and automation for a delivery of granular simulations at scale
  • Data availability: Ability to capture and process data related to preferences, turnover and price sensitivity
  • Operating capacity: From analytical equipment to generate prices to transfer the price to the point of sale
  • Coordination of all business areas: Consensus assurance on expectations, constraints and opportunity cost

 

The adoption of a dynamic pricing model is a process that requires permanent reassessment, not only of the algorithms but of the entire company in order to constantly improve and adjust the calculation and execution model. Despite the fact that it is a complex process that requires a high volume of investments of different types of resources, it is one of the most effective strategies to increase profitability and efficiently manage stocks.

Mechanisms such as dynamic pricing, which optimizes incomes and minimizes the risk of product stock impacting on margins, are essential tools that help retailers define a clear strategy for increasing profitability. They help maximize margins during sales season and avoid high markdowns, which are currently two of the most challenging aspects of the retail sector and also, areas in which more and more investments will be made to develop smart solutions based on new technologies such as AI or machine learning.

 

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