Pricing Cutting Won’t Solve the Economic Crisis
In 12 months, the UK will be gearing up for a general election, and the themes that will define it are already emerging. While immigration and the NHS remain key battlegrounds between the parties, one area dominates – the economy. A glance at recent IPSOS polling shows the scale of the problem. Sitting first and third as the most important issues facing Britain today according to voters are inflation and the economy, respectively. Reacting to this, politicians are putting pressure on retailers to cut their prices and introduce reductions. In May, we even heard warnings from The UK Chancellor, threatening new laws to set price caps for essential food items.
Yet while cutting prices can lead to short-term relief, it does not provide the long-term solution that retailers and consumers desperately need. Instead, retailers need to take a long-term approach and invest in new technologies that can enable significant cost savings. By unlocking operational cost savings, retailers can then pass these savings on to customers and avoid the negative aspects of price cutting such as:
Driving up inflation
Simply cutting prices often leads to people buying more products, putting greater strain on supply chains and the resources needed to create and deliver them. When this very same strain on manufacturing and delivery has created inflationary pressure in the first place, lowering prices further exacerbates the problem, increasing inflation.
Damage producers
As mentioned above, if the challenges faced by producers and manufacturers are causing inflation, then cutting prices will make things worse. Retailers can absorb some of the cuts, but eventually, they will get passed downstream to suppliers, producers, and manufacturers. Cutting prices can be incredibly damaging for industries like farming, which have faced many struggles in recent years. Dairy farmers have already highlighted the risk price cutting will cause to their businesses.
Risks retailers’ financial health
For retailers in particularly competitive sectors cutting prices will significantly eat into their slim profit margins, risking their financial health. While cutting costs in the short term may be possible, the longer-term view could be more of an issue. For instance, if competitors react in kind and cut their prices, a race to the bottom quickly takes hold, risking everyone’s financial future.
Distraction
Price cutting risks papering over cracks and hiding serious systematic problems. For example, while price cuts may lead to a short-term spike in sales, they can hide problems in customer experience (CX), operations, and marketing. After a while, even if prices remain low, these areas will rise to the surface and damage a business’s sustainability if not dealt with.
Undermine value
Price and value are not the same thing. Lowering prices will make products more affordable, but if mismanaged can lead to customers questioning their value. Over time this can have a detrimental effect on a brand’s value. If ignored this can become permanent and undermine the investment made to build the brand in the first place.
Ultimately, price cutting is not a long-term solution to helping consumers through what is likely to be a sustained period of economic instability. While it can deliver short-term relief, other solutions are needed. Instead, retailers need to find ways to control costs and create savings that can be passed on to consumers without risking their future or that of their suppliers.
The good news is that new technologies are stepping up to help. For instance, the rise of generative AI (GenAI) is leading to a whole host of new tools that are improving and speeding up the creation and delivery of marketing messages. Data from Opitmove suggests that 78% of B2C marketers already use GenAI to aid their campaigns. While retailers are now deploying facial recognition systems and AI to help reduce losses from shoplifting. Companies like Wasteless are even using dynamic pricing to cut down on the losses and environmental impact of food waste by adjusting pricing to incentivise customers to purchase products approaching their sell-by date.
Payment is another area that creates cost savings for retailers, which can be passed on to consumers. One new emerging payment type is particularly well-placed to deliver this – instant payments. Instant payments are an alternative payment method (APM) that enables a direct bank-to-bank transfer between a customer and a retailer’s account. The process to enable this type of payment can be achieved by a customer scanning a QR code at checkout. The advantage of instant payment is its simplicity. With fewer parties facilitating the payment, transaction fees are reduced, creating savings for retailers on every transaction. These savings can be passed on to consumers via discount codes or even directly at checkout by reducing the balance due.
Cost savings are not the only advantage instant payments offer. By building them into loyalty programmes, retailers can gain extra data and insights into customer habits, helping to personalise their shopping experience further. Over time, these enhancements to CX translate into reduced customer churn and increased engagement.
Why price cutting has been a focus for retailers and politicians is understandable. Nonetheless, it is not a long-term answer. With economists predicting inflation in the UK to remain high deep into 2024, retailers need to look at how they can create sustainable savings to pass on to customers. Technologies have already arrived that can help. By thinking a long-term view, retailers can create cost savings that can be passed on to consumers without jeopardising their future or that of their suppliers.
