October 28, 2020

Zone pricing takes on a bigger role during the pandemic

With panic buying already building momentum again, the pandemic is massively influencing consumer behaviour. Here, Bob Godfrey, SVP EMEA Revionics, points out that the economic fallout has had a huge impact on the role of price perception.

Economic and public health conditions vary wildly region by region as restrictions are lifted and reinstated. As a result, consumer behaviour has become harder to predict across multiple locations, which makes zone pricing more important than ever for retailers.

Savvy retailers are focusing more heavily on determining demand by geographic zones, using local data to inform prices, promotions and markdowns based on real-time consumer behavior. Before the pandemic, retailers were using these zone structures based on factors such as climate patterns, competitor footprint, customer demographics, or cost structures. This helped them create unique zone structures reflecting critical differences in regional consumer behavior.

Now, they have an opportunity to optimize results across the entire lifecycle of a product based on rapidly changing patterns in the wake of the virus.

At the beginning of the pandemic, we saw prices spiking sharply upwards in several key categories. Many grocers were forced to sell eggs at a loss because their wholesale costs increased dramatically. Numerous disruptions were localized, with some areas more heavily affected than others.

As a result, retailers are increasingly becoming focused on establishing hyper-local pricing based on changing demand and supply inputs. The key is to do this not only based on predictable changes in supply costs, but also to react quickly to unexpected disruptions like weather or pandemics.

The price elasticity of demand is used to measure the relationship between price and demand, and how changes to one will affect the other. All products will have different responses in consumer demand to price changes. Therefore, it’s critical to understand those differences when making important pricing decisions.

The closing of the economy, however, disproportionately affected some regions and customer bases. Retailers must determine the factors for those changes and learn how they have influenced price elasticity, for whom, and on which products in those regions. The price elasticity of each store will change independently from the rest of the business, and a well-designed zone structure will be able to identify those changes quickly and accurately with the right pricing platforms.

Retailers tend to have all the data they need to figure out how demand has changed at the local level and to pinpoint consumer trends and buying behavior. They just need the agility and technical support to create a zone-pricing structure that considers key competitors while also leveraging analytics. Using artificial intelligence to do this enables retailers to not only track the evolving demand of their customers, but also gives them the power to win the price-perception war by adjusting to conditions as they evolve in real time.

Furthermore, advanced pricing algorithms now allow retailers to dynamically execute their competitive strategies across numerous zones while maximising profit potential on non-competitive items. 

Out of crisis there comes opportunity and now is a good time for retailers to reset and build pricing structures based on a zone-pricing strategy that increases price competitiveness where it matters the most.  Having the right price, the right promotions and the right markdowns in the right locations will help drive positive results and gain market share in these turbulent times.