The true cost of pricing cutting

David Maisey
18 December, 23

Cutting prices made sense at the start of the cost-of-living crisis as inflation and rising energy costs saw household bills jump dramatically. However, as it becomes clear that the current economic situation will be with us for some time, continued price-cutting places retailers in a perilous position.

In reality, artificially lowering prices over the long-term will exasperate the problems it aims to solve. For instance, issues like higher inflation worsen as customers continue to spend, as their spending pushes up underlying costs and further erodes the headroom retailers had to cut prices in the first place. On top of that, there is the threat of retaliation from competitors. As customers head towards the brand with the lowest prices, competitors will take notice and offer their own price reductions. As retailers compete with one another to gain customers, they continue to slash prices, creating a vicious circle and, ultimately, a race to the bottom.

Yet despite the problems unplanned price cuts create in the long-term, the need to help consumers through what is likely to be a long cost-of-living crisis will not disappear. Consequently, to manage these two positions correctly, retailers must find new ways of creating savings within their operations. Creating operational savings increases the headroom retailers need to lower prices without jeopardising their future. Moreover, by focusing on efficiency improvements, retailers can enhance their resilience and sustainability, creating a healthier foundation for themselves.

With so many ways and options open to retailers to create operational savings, the biggest challenge they face is knowing where to start and what will deliver the best returns. Nevertheless, areas like waste reduction, payments, supply chain enhancements, and fraud prevention are great opportunities to create operational savings.

Reducing Waste and Alternative Payment Methods

Reducing waste is a great place to start. As every piece of packaging or product thrown away costs money, reductions here create immediate savings. Finding ways to reduce waste by eliminating unnecessary packaging, reusing products, or adopting clever sales strategies will create huge operational savings. In fact, by using creative sales strategies, retailers create savings by reducing waste and boosting revenues. An example of this in practice is the company Wasteless. Using a combination of AI smarts and dynamic pricing, Wasteless enables grocery businesses to reduce waste from fresh produce by automatically lowering the price of items approaching their sell-by date. In doing so, Wasteless turns items destined for the bin back into cash in the till.

Speaking of tills, payments are another area where operational savings can be made. The latest payment technologies, Alternative Payment Methods (APMs), are a game changer for retailers. Already well-established APMs like Buy Now, Pay Later (BNPL) have shown the appetite from consumers for newer ways to pay. The latest generation takes things further, benefiting consumers and retailers alike. Enabling payment via bank-to-bank transfers, the latest set of APMs have reduced transaction fees and even instant settlement, creating enormous savings for retailers and aiding cash flow management. To help customers through the cost-of-living crisis, retailers can offer discounts right at the till or checkout, with customers selecting the new APMs as the payment method. In doing so, shoppers can pay less without disruption or extra steps to their shopping experience.

Supercharging Supply Chains and Fighting Fraud

Supply chain optimisation is another area that doesn’t disrupt the customer experience (CX). Adopting processes and concepts like near sourcing can provide significant benefits. By bringing manufacturing and production closer to end-users and consumers, near sourcing helps lower transportation costs and eliminates the risk of fluctuating exchange rates. More futuristic options for improving supply chains can include creating digital twins of warehouses and distribution centres. Creating digital twins of these physical assets allows designers and operators to explore different operational ideas quickly and cheaply in a digital environment, refining them before they are implemented in the physical world. The value in improving supply chain operations is huge, with research showing that 79% of businesses increase revenues by optimising their supply chains.

The final area which retailers can make immediate operational savings is crime prevention. Sadly, crimes like fraud and stealing often rise during challenging economic times. According to Office for National Statistics data, shoplifting has dramatically increased in the last 12 months, with levels up 24%. Fraud too is negatively impacting businesses, with Juniper Research estimating that in 2023, it will cost online businesses alone $48 billion. While retailers factor into their business plans expected write-offs to crime, reducing losses to it creates financial savings that can be passed on to customers. Companies like Luxochain are already helping businesses fight fraud. Using innovative blockchain technology, Luxochain adds an extra layer of protection from counterfeit products. This protection translates into cost savings over time that can be used to reduce prices and create long-term cost savings for customers.

The need to help customers through the cost-of-living crisis will not disappear over the next few years. Inflation is expected to remain high, keeping the pressure on customer purse strings. Retailers, though, can’t simply cut prices. From now on, a long-term strategy is needed that enables customer prices to be reduced without putting unnecessary pressure on a retailer’s financial health. Retailers can create the necessary foundations by reducing waste, enhancing supply chains, lowering losses from fraud and shoplifting, and adopting the latest payment technologies. The technology, systems and processes are ready to help, and retailers and their customers cannot afford to wait.

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