How Retailers Can Avoid a Pricing “Race to the Bottom” This Holiday Shopping Season

The 2023 holiday shopping season promises to look different than what retailers have seen in recent years. There won’t be the supply chain issues that triggered early discounting and scarcity panic in the past two years. Yet even with&nbsp;<a href="https://www.reuters.com/business/retail-consumer/big-us-retailers-just-in-time-inventory-habit-makes-comeback-2023-08-23/" target="_blank">fully stocked inventories</a>, retailers will still face consumer reluctance to purchase because of economic uncertainty. Brands expecting shopper behaviors from 2021 and 2022 could get caught in a destructive race to the bottom on pricing. To avoid this, retailers should adopt counterintuitive strategies tailored to this unique holiday season. Rather than rushing to offer deals, brands should hold off on discounting early. Those who blink first in an attempt to juice sales risk initiating a pricing war that destroys margins. Here is an inside look at the dynamics shaping this holiday season and how retailers can best navigate them. Consumers Are in No Rush in 2023 Over the past two holiday seasons, retailers urged consumers to shop early and often due to chronic supply shortages. With limited inventory and headlines abuzz with talk of sparse shelves — particularly for hot items like gaming consoles and toys — brands ratcheted up promotions to juice early spending and ward off stockouts. &nbsp; This conditioned shoppers to expect deals leading up to and during October. Retailers even launched holiday sales weeks before Halloween in hopes of stretching their inventory while pumping up top line revenue. This year, the opposite dynamic will be at play. With supply chain challenges absent from the headlines, consumers know products will remain available even if they delay purchases closer to the holidays. There is no fear of shortages to incent early buying. &nbsp;Meanwhile, inflationary pressures and shaky consumer confidence will leave shoppers hesitant to spend freely on discretionary items. Holiday budgets will get much more scrutiny. These countervailing forces will likely translate to consumers sitting on their wallets well into the heart of the holiday season, and retailers expecting the early buying frenzies of 2021 and 2022 could be sorely disappointed. The Risks of Discounting Too Early Given inventory abundance, many retailers will feel the pressure to unleash promotions to ignite holiday momentum. While tempting, this knee-jerk reaction to spur sales could badly backfire. Without an actual need to sell-through products early,&nbsp;<a href="https://www.forrester.com/blogs/consumer-spending-trends-2023-edition/#:~:text=Here%20are%20some%20highlights%3A,less%20for%20what%20they%20buy" target="_blank">extreme markdowns mostly serve to train consumers to await deals</a>. If retailers blink first and slash prices in September or October, it signals to shoppers the pricing game is underway. This risks dampening sales until competitors match with their own deals. Rather than driving volume, premature discounts set off a race to the bottom across brands. Any revenue gains get offset by shrinking margins as retailers try to one-up each other on promotions and markdowns. Once this self-defeating dynamic kicks off, it becomes impossible to unwind. Retailers get trapped playing the discount game right up until Christmas, with each successive deal diminishing profits on units sold, all in hopes of maintaining volume. Meanwhile,&nbsp;<a href="https://www.pymnts.com/news/retail/2023/retailers-turn-to-discounts-as-consumers-cost-concerns-grow/" target="_blank">consumers know more deals sit just over the horizon</a>. This further encourages them to delay purchases rather than jump on early sales. For retailers, that’s how the holiday season stops being a revenue bonanza and instead becomes a margin killer. Avoid Knee-Jerk Discounting: The Key is Early Promotion Without Devaluation Make no mistake: this holiday season may end in an avalanche of desperate markdowns as retailers inevitably look to sell-through lingering holiday inventory. But brands will profit most by delaying this as long as possible. Come December, retailers push to liquidate product to optimize cash flow. But despite that risk, now is the time to play the long game, avoiding knee-jerk markdowns to set rational price expectations. Those who resist the urge to jumpstart holiday sales with deep discounting don’t spook consumers into awaiting better deals before buying, and they retain healthy margins for any units they do sell. They also keep their discounting budgets available for longer, which gives them more flexibility to strategically cut prices late in the season when required. When discounts do kick off in earnest, hold out as long as possible rather than matching rivals out the gates. Make competitors deplete their own margin before you ramp up deal cadence and depth.Identity Can Help Retailers Thread the Pricing Needle To successfully navigate fickle consumer behavior, personalized offers can provide major advantages this holiday season. But even here, a tailored strategy will serve retailers well. With hundreds of millions of consumers to entice, mass discounts and coupon codes incentivize the wrong shoppers, triggering deal-chasing by bargain hunters rather than nudging demonstrated spenders ready to buy.Identity solutions allow retailers to target surgical offers to high-affinity shoppers primed to purchase. For instance, Bolt has built technology to allow retailers to recognize visitors the moment they arrive on their website, allowing retailers to curate an experience tailored to that shopper and smoothing their site journey. Another recognition layer helps to provide time-sensitive discounts only to users with qualifying items sitting in their online carts—converting interested shoppers without resorting to site-wide markdowns. Identity also enables offering tiered promotions by customer value. Top-tier “VIPs” can see bigger and better discounts than everyday shoppers to sustain loyalty. Smart segmentation done at the individual level rather than the demographic level avoids diluting offers to the point they stop being special. The technology reflects the reality of this season’s retailing, which will require a delicate balancing act on pricing. Early discounts risk self-sabotage while refusing to mark down guarantees losing ground to competitors. Identity-powered personalization and targeted offers help retailers thread the needle, optimizing holiday sales and margins simultaneously. Resist the temptation to be first mover on markdowns—otherwise the race to the bottom begins.