As we move into the thick of the 2015 holiday season, retailers are in the midst of planning their annual promotions and trying to decide what level of inventory they expect to move. Determining these factors can lead to considerable profit shifts depending on how well a company gauges their potential customer base and how much those customers will be willing to pay.
Unfortunately, retailers are not as savvy as they could be when it comes to maximizing profits. Increasingly, they are fearful they will be stuck with excess inventory if promotions are not discounted deeply enough. However, finding the right discount to drive demand without tanking margins leads to higher overall profit even if a little inventory must be sold at clearance prices in the New Year.
For retailers, deciding between these two risk mitigation strategies will make all the difference when looking back on fourth quarter profits.
In regards to promotions, retailers need to examine their pricing strategies throughout the season. The key is understanding price sensitivity. For price insensitive products, increasing a discount to 60 percent from 50 percent may only drive marginal additional traffic, but that deeper cut slices margins substantially. By using analytics to identify the smallest promotional discount that will result in the highest probability of acceptance, retailers can maximize their profits.
In addition, many retailers leave money on the table when it comes to last-minute shoppers. These shoppers are often the least price sensitive, yet many retailers continue to offer aggressive discounts late in the holiday season. Better understanding how much last minute demand there will be can help retailers avoid stock-outs and reduce reliance on discounting to drive revenue and margin.
Ultimately, retailers will only be able to fully capitalize on the opportunities in the holiday season by using advanced pricing strategies based on predictive analytics. Another example of how analytics can have an impact is the use of targeted offers. By analyzing customer purchase patterns, retailers can design targeted offers and bundles that increase the perceived value to consumers and drive more volume (this is especially beneficial with “hot products”).
Retailers are historically nervous about how to move all of their inventory during the holidays, and with good reason. With so much competition coming from online goliaths like Amazon, brick and mortars retailers need to capitalize on available resources and analytics to ensure that they are selling their products to the right customers for the right price. If retailers structure their promotions and offers properly and ensure their shelves are stocked for the end of the year rush, they will be resting easy going into the New Year.