Our today’s guest is Dr Markus Husemann-Kopetzky - pricing advisor, researcher and educator, ex. Amazon Senior Manager for Pricing and Business Analytic, Founder of the Price Management Institute and author of the Handbook on the Psychology of Pricing and the (lovely) Pricing Nuggets. Dr Husemann-Kopetzkyhas shared how some retailers win during uncertainty in the market and why an elasticity-based approach to pricing is the key to success.
You are a pricing expert with a profound experience in the field who keeps a pulse on many industry players. Could you shed light on how the approach to pricing changed over the last decade?
Yes, thank you for this excellent question. My expertise lies in the e-commerce space, and I observe that over the last ten-plus years, companies have increasingly moved to a data-driven approach to pricing. And why didn't they start with a data-driven approach, you ask? That would be an excellent question. Most online stores began as a kind of branch to the offline channel. So there's a big brick-and-mortar store, and they founded a different legal entity: their e-commerce channel. And this e-commerce channel starts with the same pricing approach as the brick-and-mortar store. But over the years, the online store has grown bigger and become more or less the pricing lab to the brick-and-mortar store. So retailers developed more sophisticated models and infused a large amount of data into their pricing strategy. To find the optimal price, they started with rule-based pricing, moved on to machine learning and are experimenting with artificial intelligence, for example, based on price elasticity estimates. And I think we haven't reached full maturity yet.
Not 100% of all companies are applying a scaled approach to pricing, not even a database approach. From one case study I did, a major player with a 5+ billion-dollar business still uploaded an Excel sheet with prices once a month. And that's crazy. In terms of model sophistication, for those who use data for pricing decisions, almost 100% use pricing rules. But moving beyond rules is still a work in progress. That's what I experienced.
What is the future of pricing?
I think the future of pricing is very scientific and bright. We are not talking about personalized pricing, meaning an individualized price so that every customer has a different price for the same product. But what I see are three ways of development. First, pricing will become, as I said, more data-driven. It's not about the Procurement Department taking the procurement price and adding their target margin. That's gone. It's about using demand, price and cross-price elasticities. Second, once applying database pricing, the models will become more sophisticated, and we will see more companies using them. The third way, and maybe I'm biased because I research a lot about psychological and behavioral pricing, will be a professional and consciously chosen frame around the price presentation beyond changing the price number.
So, for example, if a customer, who is conscious of quality, goes to the retailer's website and searches for a product, they want to see high-quality items first in their search results: good stellar brands and good reviews. Then you have price-conscious customers. They want to see relevant search results based on what's on sale with a little “on-sale” sign.
Of course, we also have individualized promotions. Say there are 1,000 items on promotion that won't fit in a single promotional email. So retailers are to choose 30 items with the highest probability that the customer will buy. You don't change the sale price per se but make an individualized offer.
On the marketing side, of course, retailers can go one step further. If there is a promotional budget, you can send individualized rebates and discounts to customers, indicating a 'price for you'.
This means price differentiation. And, of course, your neighbor might have a different set of discounted items, but on average, both customers have items that fit the most and they receive a promo price that the other person might not receive. But it's still fair because both have different benefits, and nobody is taking advantage of.
And that's what I see in the future. More usage of data in price decisions, more sophisticated models when making those decisions, and moving into psychological pricing by using hard analytical skills to optimize this soft art of pricing.
Is personalized pricing in it?
If we're talking about individualized pricing, like optimal pricing on an individual customer level, we quickly run into the perception of price unfairness. I observed such cases in the airline industry: press F5 and update your website or open a secured page, and you find a lower price.
And that's not cool. Even if a customer receives a lower price and feels that other customers otherwise would pay a higher price, a client gets away with a bad feeling of price discrimination. That is not fair. Although you are benefiting this time, you still wonder whether you would benefit the next time and whether this behavior of the seller is actually fair. You might attribute an unfair behavior to the seller and this leaves you with a negative impression of the retailer.
That's my passionate opinion on personalized pricing and price discrimination.
With the retail environment being shaken by surging inflation, supply chain disruptions, etc., what significant changes do you anticipate in the retail space?
In the next couple of years, I expect two major shocks. We already see surging inflation and supply chain disruptions, and their conjunction means two things.
First, inflation means rising costs for retailers. This leads to substantial pressure on margins.
Second, inflation is closely related to fear of recession. We have people, consumers, and customers who earn less in net terms. Inflation is eating up pretty much their disposal income. And in recessionary and inflationary times, we see customers get more prudent with their money, become more price conscious, avoid excessive debt and try to save even more of their available income, just for the bad times. Following this train of thought, they postpone purchases of durable goods. If you don't need a washing machine today immediately, then let's buy it next year — the same accounts for holidays. Customers either downgrade and choose a shorter or less expensive destination or postpone holidays at all. They reduce impulse purchases, become less loyal to brand stores and go to discounters. They look for deals and lower prices.
So we see a shift in preferences and demand, meaning looking for price-entry products and private label alternatives rather than for branded products. The demand for some items might shrink in unit terms, not so much in revenue terms, because inflation-driven prices still increase.
Rising procurement costs cause margin pressure from below and price-conscious customers drive ASPs down causing margin pressure from above.
What strategy would you recommend to retailers who want to thrive in these ever-changing conditions?
My recommendation first is to get an overview of what is happening. Because not all retailers are affected the same, some retailers might even win. Zara, for example, is increasing revenues and profits. Sports retailers focusing on elite or expert equipment are also not affected.
The first thing I recommend is to get an overview of what is happening, get an inflation information center, catch early signals, and collect all your data to understand how the current challenges affect you now and what the consequences are in the future.
Then extract insights and conclusions from this data and quantify the different drivers of the inflation impact. Retailers face headwinds as well as tailwinds. And that's more or less the best part of the analysis about inflation impact drivers. Inflation is a big issue now, indeed. It is a kind of the big elephant retailers have to slice.
So what I mean is to break down the biggest inflation-driven challenges and address them surgically. That is the third step, set up projects that address the key headwinds of inflation.
Thank you. So probably, the secret to success is just slicing the elephant.
Exactly. But if our readers asked me about three emergency strategies to keep profits high, I think currently, it's about keeping the head above water. I would suggest running a profitability sprint first and increasing unnecessary low prices. And if your competitor crawling mechanism isn't updating frequently enough, all competitors might have raised their price already, and you're still involuntarily price leading in the market. So honestly, if you don't crawl all your relevant competitors early enough or often enough, and your frequency of price changes is not often enough, you end up on the sideline.
The first step is raising your profitability level by implementing elasticity-based pricing.
Second, I would suggest implementing any price differentiation, for example via rebates or discounts.
And the third has nothing so much to do with pricing. Still, you can use your pricing data and competitor pricing data available in your pricing function to negotiate procurement prices with your suppliers. So the third strategy is to systematically manage procurement prices and the vendor relationships you have with your suppliers.
These are the three things I would recommend as emergency measures.
What hard skills should a Pricing/Category manager have?
They need a solid understanding and passion for numbers in terms of hard skills. So they need the tools, basic statistics and a solid understanding of the benefits of experiments, for example, quasi-experimental designs. Pricing managers need to understand how "changing something leads to something". Master studies with a deep dive into statistics would actually help.
The pricing team gets the pricing-relevant data, analyzes them and extracts specific strategies. The next step is bringing the data into a context that is related to business. Then they need to explain the results to somebody who's not so much a number person. And that's a very empathetic soft skill, honestly.
In my understanding, pricing teams are usually very small and somehow alone. Because they have such specialized knowledge, they don't have anybody to talk to and to discuss challenges on eye-level. My experience is that personal, technical development is reduced to self-study. Internal or external seminars are usually too general to be helpful. This is an honest challenge for pricing teams.
Could you share advice on pricing resources that inspire you?
Yes, I'm very old-school, so I read books because they have much more space to elaborate on thoughts than a 30 minutes podcast. I find it usually inspiring to talk to fellow seasoned experts like Hermann Simon or Stephan Liozu. These are excellent resources, their books and conversations with them. I try to read all books that get published about pricing. And if there is a need to understand the value of pricing, I recommend The 1% Windfall: How Successful Companies Use Price to Profit and Grow by Rafi Mohammed. And what I'm currently reading and like a lot is Price For Growth: A Revolutionary Step-By-Step Approach to Massively Impact the Value of Your Company by Leveraging Focused Pricing Strategies by Jeff Robinson.