How British fashion retailers can optimize pricing to increase profit margin
Being a retailer in today’s Britain has become a tough job. You need to deal with Brexit-generated political and economic uncertainty, the notorious “death of high street”, and the growing power of online retailers like Amazon. By the way, the share of UK online shoppers browsing Amazon has reached 90%.
Being an apparel retailer is an even tougher job. In addition to all the listed challenges, British fashion sellers are under even higher pressure than others. As collection cycles are extremely short in the industry, they have to learn to get rid of old inventory even faster.
Deep promotions are a commonly used tool to get the job done, but they also mean lost profit in most cases. Meanwhile, advanced retailers are increasingly employing sophisticated pricing software to make sure that every discounted item is sold in time, yet at the most beneficial price for the retailer.
Why promos aren’t usually beneficial
Indeed, deep discounts increase traffic and help clear off shelves before the next season begins. But there are several factors retailers do not consider when launching promotions. First of all, generally only 28% of promos break even. Secondly, they do not help increase customer loyalty as they most attract bargain seekers. Thirdly and most importantly, such discounts usually eat into retailers’ profit margins and cut their profits significantly.
When it comes to clearing off stock, UK retailers launch standard markdown campaigns across all the discounted products to sell them as quickly as possible. What’s wrong with this approach is that it does not take into account such a parameter as demand elasticity. The demand of different items reacts to price changes differently. Some products need to be offered at a lower price to attract more shoppers. Others can be sold even at a higher price safely and help maintain profit margins. Demand-based differentiated promotions when every item has its unique discount depth are thus more effective than traditional ones.
What prevents retailers from launching efficient promos which both boost traffic and increase revenue? There are several reasons for that. The thing is that the apparel retail market is extremely dynamic and competitive, and is likely to get even tenser in the years to come. Thus retailers need to make sure that every item in their assortment has the right price at any given moment and contributes to maximizing the retailer’s total revenue. As a result, the sheer amount of data retail teams need to analyze to set optimal prices with the necessary accuracy and speed is insurmountable for humans.
That’s where the new wave of pricing software shows up.
How pricing tools help retailers boost profit margins
The thing with promos is that they should be deep enough to attract shoppers and ensure that the items are sold before a deadline. But they also need to be as profitable as possible as no one wants to lose money when there is a chance to earn it instead.
According to recent market tests, next-gen price intelligence solutions can help apparel retailers increase profit margins and gross profit by 200 basis points and 10.3% respectively. It happens thanks to artificial intelligence algorithms powering most of today’s pricing software. Using AI means being able to process any amount of data necessary extremely quickly, see all the hidden patterns humans cannot reveal and provide data-driven price recommendations (regular or markdown) in real-time.
Modern pricing tools prevent retailers from going through endless Excel sheets and relying on their gut feeling. Such tools allow retailers to launch differentiated promos and, as a result, keep their profits. By using pricing software, apparel retailers get to know:
- which items should be priced lower to lure customers;
- which items should be priced higher to compensate for potential margin losses;
- the exact depth of discounts for every particular item, which allows for profit boost.
All in all, wrong promotions are a big pain for UK apparel retailers (as for any other apparel retailer worldwide). Too deep discounts kill profit margins, while too high prices detract customers and kill sales. Next-gen pricing solutions powered by AI can help British fashion sellers to balance between these two extremes to stay profitable in today’s extremely competitive market.
Alexandr Galkin is CEO & Co-founder of Competera