How inflation trends influence pricing decisions in the fashion retail industry | Season 1 – Episode 3 

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Introduction

Eirini Athanasopoulou: Hello and welcome to the Retail Pricing Insights Podcast by 7Learnings. My name is Eirini Athanasopoulou and I will be your hostess for today. 

Welcome to our third podcast episode. In this series, we aim to improve your pricing strategies by inviting experts to discuss industry trends and share actionable strategies with you. We have access to these experts throughout our Dynamic Pricing Community, which we have been building for almost two years. We are organising and hosting events. We also have a LinkedIn group and there is a lot of networking around it. If this sounds interesting to you, go ahead and apply for our community today. You will find the link in the description of this episode. This community is completely free of charge, but you have to apply and we are strict with our membership rules. 

Today, I have the honour to speak with Lorenzo Zacchia, an experienced international executive with more than 20 years of practice in strategic and operational management in the fashion and retail industry. He has extensive experience in other big fashion brands like Pinko, Guess and Trussardi. 

Today we will talk about how inflation trends influence pricing decisions in fashion retail. We will touch on promotion strategies and of course, actionable points about Black Friday. If you are ready for an episode full of insights, let’s welcome Lorenzo. 

Hello, Lorenzo, and thank you so much for joining us today.

Lorenzo Zacchia: Hi, thank you.

02:01 EA: It’s exciting to have you here today straight from Milano to discuss the inflation trends and how they influence the pricing decisions in fashion retail. Let’s begin by delving into your journey. How did you initially get into the retail world and what was your involvement with pricing?

02:20 LZ: So thank you very much for this first question. I actually started in retail very early in my career, almost 21 years ago when I joined the consulting industry and I started working with the Boston Consulting Group. It was 2002 and I had the chance to learn retail very early. By the way, with some of the best in class retail companies in many different retail sectors. So for example, I’ve spent a lot of time in my early career working for large food retailers, such as Carrefour across Europe, and some important consumer electronics retailers, such as Dixons in the UK. And very important Duty Free airport and travel retailers such as World Duty Free in the UK and Aldeaza in Spain, and of course, fashion retail.

So during my first step of my career, I spent many months working for important fashion retailers and department stores, both in Italy and in a few other European countries such as France. I have to say that my love and passion for retail started quite early, as you can see. It grew definitely over time and coming to the point on pricing actually, and your question about pricing, I was definitely exposed to important pricing topics. Actually if I remember correctly, it was really 2004 or 2005 that I was again working at the Boston Consulting Group. In the consulting industry, I was working on an important project where we had to address a complete price review strategy for an international supermarket chain. The goal of the project was really to reorganise and review the pricing architecture of many product categories, specifically in the fresh product departments. And this was part of a very important category management project with the client. So the project was really about performance analysis of the different products at different price points. It was really about also pricing benchmarks against competitors to really review the price architecture and maximise the sales and margins for the customers. So a very, very interesting project that I was very lucky actually to do pretty early in my career. 

04:40 EA: Wow. This sounds like a very dynamic and long path. Very nice. Thank you for sharing this with us. Now let’s continue with more pricing topics and questions. Given your extensive experience in the retail fashion industry, what insights can you offer on why retailers should prioritise and invest in pricing discipline?

04:50 LR: Well, here we really are at the core of retail with this question. I would start from one point. In my experience, roughly 20 years experience, to be successful in retail and to really create sales performances, sales per square metre results, of course, there are many variables, many dimensions, and the fact is that all the different dimensions should work together and be very well orchestrated.

What I mean by this is that pricing is definitely one of these variables and definitely one of the most important, I would say, but it should be absolutely managed coherently. With all the other ones, right? Such as the product offer, the customer service, the store location, like marketing campaigns, vacation, etc.

So here, your point about discipline, I think is the key point and discipline to me means that price and pricing strategy should be, first of all, coherent with all the other dimensions, right? You cannot apply a high price positioning if you are in a retail location and in a catchment area where the type of customers are not premium customers, just to give a very easy, simple  example. 

But discipline is not only that. Discipline on pricing, I think, means always approaching pricing with the eyes of the customer. You always have to ask yourself, what are the customer expectations on your product? And what is the value that they assign to your offer, your product and your brand? 

A good pricing strategy, as we said, by itself will not guarantee a successful retail performance. The pricing strategies should be built in a coherent way with all the other dimensions, retail dimensions. But the other side is that a wrong approach to pricing can definitely create bad results, right?

I think to summarise, pricing should definitely be on top of the agenda of the top management. The discipline is key and this set is twofold. So discipline means coherency with other retail variables and it means discipline in listening to the customer, voice of the customer, right? Many times I saw brands that took pricing decisions just based on the target product margin they have to reach, right?

So in what we call it normally retail, a cost plus methodology, then considering the real customer willingness to pay a certain price. This is to me what discipline means in pricing. How pricing should be considered, is a relevant aspect of the retail business in general. 

07:50 EA: That was a very extensive, I would say, overview, and we can keep for sure some keywords that we heard here, like pricing discipline, the customer, the margin points, etc. And now we could go a bit more into topics that are trending at the moment. In recent years, discussions around inflation have been prevalent and it’s known to impact the economic landscape significantly. Could you elaborate on how inflation poses challenges within your company and what strategies have you employed to adapt prices in response to these inflation trends?

08:27 LZ: Well, that’s definitely a very hot topic. I think at least since one year, one year and a half, something like that, as we all know, and I think I’m talking based on my experience, but I think many retailers and brands face the same issues. Inflation hits on two key areas of every company, right? We had inflation on the cost side and more specifically in my case or in our case, of course, on the product costs on the supply chain side. 

And we have inflation on the cost like from different costs, such as energy, rent, store, rent, logistics, that are all, let’s say, key costs for a retailer. But on the other side, we also have to face inflation on the sales side, let me say, so on our pricing structure, considering that the entire market was raising prices. It was not only us, which we were willing to raise prices or forced a little bit to raise, but the entire market was moving in the same direction. To face the inflation challenges on the cost, but also on the revenue side, we would put in place different actions, several actions well on the cost side, but I do want to enter into a lot of details on that, but of course we have to address each cost item separately to protect as much as possible ourselves against current, the future increases. We worked on the supply chain with our idea of our supplier portfolio and changing country mix, pushing production in Bangladesh or Vietnam versus China, etc. And this work of course requires a lot of activities, working category by category, supplier by supplier, but most importantly, which I think was more also the object of your question, we worked on the revenue side of the real price architecture of our product offer. I would say we put in place two major things. One is a market pricing monitoring using a dedicated web based platform that provides a complete overview of the online prices, changes of several fashion brands that are for us relevant competitors. With this platform and with pricing monitoring tools, we are able to actually understand the price changes of the competition and really understand whether they are raising prices or not, in which categories, in which markets, etc. The second thing that we put in place was to schedule ourselves a monthly price review to go through our current price architecture, SKU by SKU.

The way I’m looking at the new products that we are going to deliver to the stores in the following month, where we can, of course, do adjustments and we can adjust prices up or down.  As you may know, we have a fast fashion retail business model who delivers new SKUs and new products every 15 days in the store. This allows us to be quite flexible on the prices, right? So we can adjust As much as we want. 

11:46 EA: Of course, ensuring precise pricing decisions is crucial. You already shared with us two approaches you are currently applying. But do you have any other methodologies or tools that you rely on to make informed pricing adjustments?

12:04 LZ: Well, I think the two tools that I mentioned before are definitely very important. So, as I said, one is competition monitoring. And, you there have to go into the details of what are the changes, the price changes applied by the competitions over the last 6 or 12 months, category by category. Where did they increase prices? The internal review, I said, what I didn’t mention before, which is definitely another tool on our product portfolio. We usually create a set of KPIs. So a dashboard, a simple dashboard. To really understand the performance of each SKU and of each product at its price point and the most important indicators for us to really understand if one product is having, let’s say, a good or a bad performance at one specific price point, it’s really to understand what we call the daily sell through or the weekly sell through of the product, which is a typical sell indicator in the fashion retail. It really represents if you want the sales speed or the sales velocity of this specific product. If we see that one product, you know, whatever 99 euros has a very slow sales result in terms of sales per day, then we really question ourselves whether the price positioning is correct or we should reduce the price, right?

Together with that, the other indicator we look at, it’s always the SKU margin. The product margin net of the promotions to understand whether at these price points, the sales velocity first, it’s very good or bad. And the product margin is at the right level or not. With all these ingredients we try to understand which type of price adjustments we can make.

13:57 EA: Very nice insights on this. You touched a little bit on fast fashion retail and of course being in the retail industry means that you do a lot of promotions. Can you tell us what triggers a promotion and how you determine the discount level on a product basis? 

14:16 LR: Absolutely. And let me say that in our market positioning, promotions are very important and if we manage them properly, we can really generate incremental margin and incremental profit. So I would say that there are federal drivers that can really trigger a promotion in our business model. In our segments, I can mention a few drivers. First, we can run promotions because we need to accelerate the sales speed of what we call worst sellers that actually are really probably wrong. We probably made the wrong product, the wrong colour, or the wrong feet, but the wrong feet, and we didn’t need to make a promotion to accelerate the sellout. The second example is that we can run promotions to stimulate, for example, customer demand, but during a specific period where generally speaking, there is less intention to buy, right? For example, months like September and March, which are really the beginning of the new season, whether it’s all winter or spring, summer. Customers in general don’t have a very strong intention to buy. So you need to activate a few promotions to stimulate the purchase’s intentions. Third example, we can run promotions to improve customer retention or in some cases to acquire new customers. So in this case. If we see that a customer has not come to our store since, you know, 6 months or 10 months or even one year, we can run segmented promotions, dedicated to specific customer segments to stimulate their purchase intention and make them come to the store and make a new purchase with us. In terms of optimal discount levels of the different promotions, actually it really depends on the type of promotion. During the regular season in fashion, when you are not on sale, we normally apply discounts in the range of 10% – 20% in very few cases, we maybe do 30%. 

Having said that, to really apply the correct level of discounts, we always have to analyse all the previous promotions, the historical promotions, to know the exact impact on every single KPI, such as conversion rates, UPT, etc, and simulate what the new promotion could deliver in terms of product margin, right?

And the decision is always, we look at the historical results, create a simulation with the new promotion we have in mind, and we measure the promotion after the execution to understand if we really created and generated incremental product margin or not. If the answer is yes, it means that the promotion, of course, was successful. Otherwise, we have to review. It means that it didn’t work and we have to review the mechanics or the discount or the application for the promotion in general. 

17:22 EA: Very practical points here. As we wrap up, I’d like to ask you a question we pose to all our guests. I know that we are very close to the biggest event for the retail sector, which is Black Friday, of course. Can you provide our audience with two or three actionable tips on how businesses can best prepare for Black Friday? 

17:44 LZ: That’s a very, very interesting question to close our conversation. I think all retailers already thought and developed a strategy for Black Friday. First of all, let me say that Black Friday is officially the most important commercial event in the fashion retail calendar. Again, definitely in our segment. And it became much more relevant than the beginning of the sale period, end of season sale period. And this is true across all different retail KPIs. So it’s the most important event in terms of traffic, conversion rates, and sales results. You have this, let’s say the second half of the month of November, but it’s really, really big in terms of APIs.  So if we start from this, my tips are very simple. If you consider that this is a big event with a traffic peak, I think there are at least three tips that I have in mind for retailers in general.

One, you have to have an effective lead acquisition strategy, lead acquisition campaign to acquire new customers.This is the perfect moment of the year to acquire new customers because all of them are willing to buy. So you have to develop and implement a lead acquisition campaign starting probably 10, even 15 days before the Black Friday provide specific benefits to potential new customers. 

So that’s a critical aspect. The second tip for me, is related to the fact that you need to maximise conversion rates. So at this moment, during a Black Friday, you have a lot of traffic, a lot of people in the store. And you have to maximise that and your sales team will not be able to convert them all or to serve them all. You have to have, let’s say, a very simple promotional system or a very simple promotional mechanic because customers will come into the store and will immediately understand which type of promotions you have during Black Friday. And we’ll take their decision in a very fast way. So you need to have something very simple and very easy to understand for the customer in terms of promotion. 

The third tip to me, it’s more about omnichannel. I don’t know how many retailers have different omnichannel functionalities in place. In our case, but I think it’s the case of many retailers, we have a very important omnichannel feature, which is what we call the ship from store. Customers that go online, place an order, but then the product is fulfilled and the delivery is fulfilled directly by the warehouses of the different stores. In this case, the ship from the store is critical during Black Friday. So my suggestion here is to plan well in advance all the activities and all the operational workload that you will have in the stores during Black Friday to make sure that you can properly address and fulfill all the online orders that the stores will receive during this period. And to avoid, you know, customer dissatisfaction, because if customers place orders during the Friday, but orders are not fulfilled or are fulfilled, you know, with five days of delay, that’s, that’s a big problem. 

21:19 EA: It seems that these tips come from experience. Thank you so much for sharing this with our audience and with us today.

Thank you so much, Lorenzo. It was great having you here today. 

21:30 LZ: Thank you very much for this conversation. And it was a pleasure also for me.  

21:35 EA: This was the Retail Pricing Insights Podcast. From now on, you will receive one podcast episode straight to your inbox if you subscribe to our newsletter. So go ahead, use the link in the description and subscribe to the newsletter now. 

As well, as mentioned in the beginning of the episode, I would love you to be part of our Dynamic Pricing Community. The only thing you need to do is to go to our Dynamic Pricing Community page and apply there directly. The community is free of charge and you will gain lots of pricing insights as well as connections in the retail pricing world. We will review your application and hopefully we will see each other, not just on the podcast, but in our future events. 

Thank you very much for tuning in today to the third episode of the Retail Pricing Insights Podcast by 7Learnings. More pricing content is coming. See you soon.

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