Relevant assortments engage customers. Especially in shorter lifecycle retail, curated choices are key to driving fashion-forward excitement. While broader assortments are a safer bet to catch the latest trends, they increase the risk that more products will fail to perform. Overly broad an assortment and the liquidation of unsold inventory will eat away margin. However, too sparse an assortment and the resultant lost sales and diminished customer perception will erode market share.
Recent market conditions have forced retailers to refine their assortment strategies. Some have applied advanced analytics to reduce the overall assortment while minimizing lost sales risk. Curating assortment is an ongoing process but also a limited process as over-curation can be as risky to sales and profit as over-buying.
Ultimately, fashion assortments represent risk. Too little risk equals too few sales and too much risk equals too little profit. Assuming perfection in buying remains out of reach, the next best strategy is to mitigate the inherent risk of fashion buying. This mitigation is where Lifecycle Pricing solutions provide value.
In retail, as in any other industry, it makes sense to deploy risk mitigation strategies wherever there is risk. Think re-insurance for insurers or investment hedges for financial funds.
With inventory liquidation a given, if not desirable up to a point, it makes sense to manage clearance risk. Liquidating inventory will not and should not go away but here’s how to make it hurt less:
1. Early Identification
The math is clear. Identifying slow sellers earlier in the demand cycle allows for less costly discounts to bring inventory in line.
Clearance products face an underlying reduction in base demand over time. The longer the wait to use price to bring inventory in line, the greater the discount needed and the greater the hit to margin.
The challenge is identifying the products that need action now. AI solutions have proven to be robust in predicting demand - especially in-season.
AI’s pattern-matching prowess can differentiate between slow-starting versus non-starting sales cycles, even with very early sales reads.
2. Managing Different Goals Through the Selling Cycle
Lifecycle Pricing is about managing different outcomes through a product’s selling lifecycle.
Evaluating a new receipt against a markdown criterion makes little sense. New products often must find their footing, and customers may not endorse the product with the timing a retailer would expect.
Later in life, a product has had its market exposure. Sales expectations and inventory levels are different. Lifecycle pricing applies evolving criteria to measure product performance through its lifecycle and de-risks the tendency to over or underreact.
3. Understanding Price/Demand by Product and Time
Lifecycle pricing combined with AI-based demand sensing allows for a multi-dimensional evaluation model, unlike pure sell-through-based pricing solutions.
Lifecycle pricing recognizes that demand evolves over time and establishes appropriate expectations at the most granular product level.
AI modeling, with its superior pattern recognition capability, provides a deeper and more granular estimation of price effect. Products may seem similar on the surface, but customers respond to them differently.
Mitigation of liquidation costs is greatly enhanced by understanding individual product affinities to pricing and how those affinities change over time.
4. Consistent Prioritization of Needs
Regardless of the pricing support for maximizing return on invested inventory, there is always a need to prioritize.
Budget constraints, floor space, new assortment receipts, and market conditions drive different urgencies in clearance spending against sell-through of on-hand inventory.
An objective, single, comparable measure of discount need is essential in productively managing pricing for inventory.
Numerous measures are available, but they all share the characteristic of comparing the ROI of a product’s inventory over time. Putting the revenue/margin potential against inventory investment is at the heart of discount spending.
5. Understanding the Impact of Rules
Sometimes, the worst impediments are those we create ourselves. Pricing rules and goals are necessary, but understanding their impact and making sound decisions about those rules is crucial.
The very same capabilities of a lifecycle pricing system can be leveraged to educate merchants on the impact of desired price rules.
Many of the most restrictive pricing rules that block efficient pricing come not from careful analysis but from gut feelings about customer response or, worse, legacy policies derived from a time of manual processes.
Clear understanding of the trade-offs of more restrictive pricing rules is necessary for effective management of any pricing process or solution.
6. Aligning Pricing with Business Goals
Pricing is merely an end goal but one of the most powerful tools a retailer has to achieve business goals.
Strategy is best served with goals that match the objectives of products throughout their lifecycle.
Policies guiding pricing objectives and rules must be closely aligned. System constraints inconsistent with desired results will lead to costly recommendations and merchant distrust.
Too often, pricing runs in isolation of merchandise buying processes – relegated to a role of cleaning, up as best as possible, the failures of assortment and allocation. However, pricing is more than a clean-up tool. Comprehensive Lifecycle pricing should complement expanding fashion assortments by reducing the inherent risk in inventory investment.
At Digital Wave Technology, our lifecycle Pricing enterprise solution is integrated into the same ONE™ platform as Merchandise Financial Planning, Assortment Planning, and Allocation. This integration ensures a unified data model, consistent user experience, and a single version of the truth. By leveraging our advanced AI-driven tools, retailers optimize pricing strategies, enhance decision-making, and drive profitable growth. Reach out to the Digital Wave Technology team today to learn more.