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02/08/2021

AI-powered pricing strategies to leverage growing demand for private label

Virtually every aspect of retail has been wildly altered in the pandemic landscape, and private label is no exception. A recent global shopper research study identified growing interest in private label — with 37% saying that they purchased private label products over national brand pre-COVID, and 43% saying they do so now. And they do not plan to return to their pre-pandemic brand preferences: 44% say they will continue to purchase private label over national brands a year from now.

While shopper preferences for private label were on the rise even pre-pandemic, the COVID-19 pandemic has pressed the fast-forward button on that trend. Furthermore, the private label stigma of perceived lower quality is falling away rapidly. Result: private labels increasingly go head-to-head with national brands — so it’s critical to get your price strategy right across the entire category mix.

It’s a strategic moment to aggressively engage shoppers on items that they see as value-oriented and, increasingly, high-quality. How can retailers take decisive steps to capitalize on these shifting shopper preferences?

Leveraging science for specific, actionable insights
The same study showed heightened shopper price sensitivity during COVID, as shoppers grapple with economic uncertainty and, for many, reduced income. Against a challenging economic backdrop, shoppers consider price more important than product quality (28%) and availability (18%). This is particularly true for necessities such as grocery, with 66% of respondents saying price would be “extremely” or “very” important to them in selecting where to shop for groceries, vs. 61% who felt this way before COVID. 

Using today’s AI-powered price optimization, grocers can gain real-time insights into shopper price sensitivity down to the store-item level, with science that separates true demand signals from the noise in real time, including factoring competitive price elasticity. Even more critically, the price recommendations generated by science-based optimization show retailers the most important price updates to prioritize – in other words, category managers and their pricing teams can focus on delivering competitive prices on items that are most important to their customers, and therefore those that will deliver the highest impact in engaging shoppers.

As shoppers adjust to more price-sensitive shopping patterns and experienced availability hiccups driven both by supply chain havoc and pantry-loading, they are increasingly willing to turn from national brands that have been their long-time go-to items and instead turn to private label. Moreover, they are increasingly loyal to brands they trust. As they experience the high quality of today’s store brands, they are now settling into definite private band preferences, both near-term and longer-term. Science-based prices give merchants the chance to keep store brand prices in the range that will attract and retain these shoppers and, more importantly, know where they can regain margins elsewhere in the assortment to meet overall financial and business targets.

Price-aware shoppers have more price transparency than ever — and expect fair prices
Another dynamic at play during the pandemic is the dramatic shift of shoppers online, even among demographics like Baby Boomers who were generally late adopters of online channels. With online shopping, however, comes 24/7 price transparency as shoppers can with a single tap see what any given competitor is offering on prices on any given item. These price-sensitive shoppers have a strong sense of price fairness, with 3 out of 4 shoppers (74%) saying they encountered unfair or arbitrary pricing during the pandemic, and 56% of those shoppers saying they will not commit to returning to shop at that retailer. Here again, category managers have the opportunity to position store brands for success, delivering science-driven prices that meet shopper expectations, ensure long-term loyalty, and gain share over national brand competitors.

The retail science innovators win — at their competitors’ expense
Times of chaos present opportunities for innovation and strategic changes as old ways of thinking grow increasingly irrelevant. Innovative merchants are leading the way with thoughtful, strategic price approaches that leverage science, align with price image, engage shoppers and sustain healthy margins. Meanwhile, less innovative competitors run the risk of not only losing short-term shoppers, margins and basket sizes, but of becoming increasingly irrelevant.

Cheryl Sullivan is president of DemandTec, offering lifecycle pricing solutions for retailers.

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