High inflation poses several challenges for companies in the fashion industry. On the one hand, the costs in the supply chain are increasing: for components, labour, transport. At the same time, final prices are rising and purchasing power is falling on average. Retail sales still seem to be holding up reasonably well, but a decline is expected.
Fashion companies can respond to inflation by raising their prices too, but risk losing customers in the process. Another option is to swallow the effects of inflation itself and let margins shrink. Is there a middle way? In February of this year, five analysts from the consulting firm McKinsey gave a number of tips for adapting pricing policy to the challenges of the corona pandemic. These have been adapted to the current context and republished. FashionUnited introduces some of them.
Change discounts and special offers
Fashion companies can protect their profit margins by offering fewer discounts. As a result, the value of the products does not decrease in the eyes of the consumer and at the same time the income does not decrease too much.
These can be general discounts on the entire range, but also discounts that are necessary to sell the remaining stocks that are still in stock, so-called clearance discounts. To free up warehouse space, it’s better to opt for less inventory in the first place, argues McKinsey.
Raising the limit for free shipping
The McKinsey authors propose raising the floor for free shipping. For example, if a retail company offers its customers free shipping with a total purchase value of at least 50 euros, this could increase to 75 euros. Raising the free shipping limit could preserve profit margin on small shopping carts without increasing product prices.
The art of price increase
If prices do need to be increased, the authors believe it is important to do so in a subtle way. Instead of raising prices for all products by the same percentage, this process can be broken down by product or segment. Prices can then be adjusted based on consumer values or, for example, the price elasticity of a particular product. To do this, it is useful to know which products are considered particularly necessary, attractive or valuable by consumers.
If not the prices, then the offer
Instead of increasing the prices, the offer itself can also be adjusted. For example, if a company knows exactly what customers want and what properties they are looking for in a product through the data from a loyalty program for customers, it can focus on this when developing or sourcing products. It can make sense for retailers to focus on their own label, as adjustments can often be made more quickly within their own chain.
To stay updated
With all of these propositions, it is crucial for businesses to keep tabs on how consumer behavior is evolving in the coming period. The price and delivery policy can then be adjusted accordingly. Even once these decisions have been made, it is important to observe how consumers react to them and whether their behavior remains the same over the longer term – surprises can always occur in a rapidly changing economy.
This translated article originally appeared on FashionUnited.nl.