Retailers Misreading Price Sensitivity Face Risks, Fewer Rewards

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In retail, it’s considered bad if a consumer sees a product he or she likes in the store, only to experience sticker shock when they look at the price tag. But that’s exactly what happens when prices aren’t in line with what the customer anticipates. Those expectations, however, are a moving target.

Often, the changes to consumer price sensitivity fluctuate as key demographics move into different stages of their lives or, conversely, when new generations move into a retailer’s target life stage with a different mindset from those that proceeded them. Add with the Internet and price transparency, and it’s possible that shoppers’ idea of what they’d pay for a specific garment could be far out of whack from how retailers are setting their prices.

The result? A glut of overstock on one end of the spectrum, or missed margins on the other.

In “Decoding Price Elasticity to Unlock Revenue and Minimize Risk,” cloud based technology company First Insight highlights where retailers might be missing out on sales gains. Defined as how much demand fluctuates based on price changes, elasticity when plotted against average price per category, as First Insight has plotted it, shows the opportunities—and danger zones—in the market.

With the apparel retail sector reeling from a perfect storm of competing issues, nailing price is more important now than ever, according to Greg Petro, CEO of First Insight.

“Offering the right product at the right price is a key determinant of the success or failure of retailers and brands in today’s shopping environment,” Petro said. “Retailers able to meet shoppers at the intersection of price and elasticity have the greatest opportunity to increase sales and revenues with the least amount of risk.”

For women’s wear, the company’s research shows that overall shoppers’ price sensitivity is abating, which means at least for some categories, retailers can hold or even increase prices. One sector where retailers have a little more room to play is swimwear, which is seeing elasticity plummet. First Insight hasn’t seen retailers take advantage of this opportunity by increasing prices, however.

Other categories where elasticity has been subdued are sleepwear and lingerie. Dresses too are facing less pricing pressure but prices have been going up and First Insight warns they may have reached their ceiling.

The news is less encouraging for outerwear, accessories and tops, which are seeing greater elasticity due to buying trends by both older and younger demographics. “These trends are consistent with the maturing womenswear market, as older shoppers are buying fewer items, and cash-strapped Millennials who are drawn to fast fashion brands are driving greater elasticity in everyday purchases,” the report noted.

In men’s wear, opportunity and risk are sprinkled throughout the category. For instance, the report states outerwear prices could afford to increase given the historically low elasticity. Underwear is another area where stores could get more margin, representing a new opportunity for a classification for which shoppers are usually much more price sensitive than they are today.

First Insight credits retailers with capitalizing on the declining elasticity in accessories and footwear, leading to increased prices in the former and steady prices for the latter.

The company warns against price increases in bottoms as male shoppers continue to be skittish when they see hefty price tags in that department.

When it comes to children’s wear, the report indicates retailers are missing opportunities by being unaware of the rate at which price elasticity is falling. In fact, it found that price sensitivity was at its lowest of all the categories it tracked. Sleepwear, where prices are creeping downward, actually is an area where stores could reverse their downward pricing trend.

Tops is an area where modest price increases could be tolerated, while footwear and bottoms have probably reached their peak, according to First Insight.

Lead by millennials’ entering the housing market, home goods has shown an uncharacteristic rise in price sensitivity, the report shows. This represents a significant risk for the sector, which has been increasing prices steadily. Only textiles and housewares continue to present opportunities for current pricing or slight upticks.

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