Outsmarting the race to the bottom this holiday season

It’s October, and along with the spring breeze, the initial swathes of Christmas goods have arrived. Last holiday season saw official retail sales figures fall well short of expectations, but it wasn’t because Australians were buying less. Rather, retailers drastically lowered prices due to poor ongoing sales, resulting in a drop in revenue. In many cases, retailers had simply become so anxious to compete that they joined in a race to the bottom.

Recent US studies have shown that pricing is the most important factor for 70 per cent of online consumers. However, when the race to the bottom begins, customers end up expecting markdowns all the time. They become more likely to wait for a sale before making a purchase.

If retailers adopt the same reactive pricing strategy this year, Australia could be in for a disappointing holiday season where shopping’s concerned. It’s worth considering other options, especially with Amazon ringing in just in time for Christmas.

The problem of the price rut is born out of a competitor-focused strategic approach. What if businesses took a step back to look at the constant in the equation? What if they focused on the customer, rather than the competitor? Many react to the competitive climate instead of planning for it. They aren’t taking the necessary steps to fully understand their omnichannel customer.

However, a few retailers have cracked it. These champions are set apart from the rest – they have all the right pieces in place and are seeing results. And, there are a few things they have in common.

They know where they stand

These retailers have a clear customer value proposition. They know which category they’re positioned in, such as price leader, category expert or premium play, and they know who their competition and target customers are. This clarity is essential for any strategy. Once it’s in place, it becomes much easier to create well-defined objectives for a pricing strategy with metrics and goals set from the beginning.

They compete with informed decisions

These retailers use data and analytics to inform their pricing decisions and have the organisational infrastructure to support their decisions. They have teams that deploy data-driven pricing capabilities to gather competitive intelligence and to optimise their own prices accordingly, sometimes with dynamic pricing. They use rule-based pricing on their key value items to protect revenue, and use customer data to create narrowly-targeted promotions.

They know there’s more to success than price

Finally, these retailers are patient with the results, unafraid of making mistakes and, most importantly, recognise that price is not the only lever. Last holiday season, Walmart, Toy “R” Us and Target hatched a noteworthy strategy in the US. Rather than competing on price, each retailer offered an exclusive variety of the toy. Target’s exclusive was the Bearakeet, the Toys “R” Us exclusive was the Owlcorn, while Walmart’s was the Burtle. Service, assortment and, as illustrated by the Hatchimals example, exclusivity, are some other key levers retailers are using to become more proactive and avoid diving into a pricing race to the bottom.

Merely copying or reacting to a competitor’s movements is a scary proposition for any business. The founder of Walmart, Sam Walton, once said, “If you want to compete with me, do what I don’t do”. Jeff Bezos did just that and founded Amazon. Amazon forced many American retailers into a difficult pricing rut, where retailers frequently forgot why they existed and instead obsessed with their competitors. Will the same be true of the Australian market? I hope not.

Mihir Kittur, Co-founder and Chief Commercial Officer, Ugam

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