How to Maintain Profits and
Earn Consumer Trust Amid
Price Cuts

This article was originally published in Supply & Demand Chain Executive.

Retail giants plan to reduce prices, but at what cost?

Inflation has risen from 20% to 30% in the last three years, according to CNN. Consumers are holding their wallets tighter as sellers seek ways to bring customers back to stores and drive spending. Retail giants including Walmart, Target, Walgreens, and Best Buy have announced price cuts on thousands of products this summer.

So, how did we get here? Retailers face increased competition among seemingly endless e-commerce options, economic challenges, and downturns in consumer confidence. Recent research by PwC revealed a large trust gap between business executives and consumers. The survey revealed that 90% of business executives believe customers trust their companies, yet in reality, only 30% of customers actually do.

In addition to a moral case for building trust, there’s also a business case, with 93% of business executives agreeing that the ability to build and maintain trust improves the bottom line, according to PwC. With constraints on consumer dollars and loyalty, vendors must find a way to reinspire customers to use discretionary funds at their stores. Enter: price cuts.

Amid price reduction promises, retailers are asking, How can we reduce costs while maintaining quality and experience? First and foremost, sellers must consider their business strategy to understand how and where to cut costs without negative impacts on the consumer.

Blanket Budget Cuts Hinder Long-term Success

Blanket budget cuts provide some short-term relief and longer-term costs. A better solution for many retailers is focusing on how to optimize indirect spend. According to McKinsey & Company, indirect costs typically equal about 10% to 15% of sales. By scrutinizing indirect spend, retailers can continue to obtain and offer all the products and services customers want and ensure the quality they expect with reduced overall operating expenses.

An organization that takes the “blanket budget-cut approach” must make difficult decisions with negative results for the brand and consumer.

Consider These Negative Impacts of Cutting Costs in Critical Areas:

• Labor: Limitations on the workforce will cause a burden to associates. Among employee distrust, lowered productivity, and disengagement, Harvard Business Review finds companies that conduct layoffs underperform for three years longer than businesses that do not. Longer lines and wait times for customers to receive support will also reduce experience and brand loyalty.
• Logistics: Shipping delays and inventory reductions will impede the customer experience, potentially further diminishing brand loyalty and trust. Consumers will seek competitors who can deliver the products they need when they need them, sometimes even trading convenience for price.
• Quality: Reduced quality of goods and services could upset consumers, causing dissatisfaction and distrust toward the brand.
• Marketing: Swapping marketing expenses in the name of cost reduction has higher long-term costs for brand reputation and awareness.
• IT: Giving up IT innovation and security hinders e-commerce potential and viability, sacrificing the retailer’s ability to keep up in the fiercely competitive online marketplace.

Retailers Must Spend the Right Dollars in the Right Areas

Successful budget cuts require extreme attention to detail. Therefore, sellers must find ways to put their dollars to the most productive use. Spending the right amount of money in the right value equation is essential to maximize profits and maintain customer experience and the quality of products.

Cutting indirect spend is at the core of a profitable business strategy. Right-sizing cost structure in indirect spend helps maintain profitability when lowering pricing and lessens the impact on customers and associates.

During this trend of price-slashing initiatives, it’s important to understand how retailers will continue to meet the expectations of shareholders. In 2023, Target reported $107.4 billion in total revenue. This year, shareholders will expect another strong performance despite reduced prices, which is why cutting back in the right areas is imperative for businesses to ensure profitability now and in the future.

Focus on What Right-Sizing Cost Structure Looks Like

Not all retailers are created equal, which is why sellers must understand what it looks like to right-size cost structures based on their industry and customer base. Consider the products your business offers and the types of customers who purchase them. Understanding what is important to your consumer helps to inform your cost strategy.

Examining and investing in price is integral to every business, but all retailers think about this differently depending on the products they sell.

Know the Industry and Understand What the Consumer Values

Tailoring cost structure to your industry requires market intelligence to understand what you should be paying and awareness of alternative specifications across suppliers. With this knowledge, retailers are empowered to deliver the products and services customers seek with the strongest value equation in place.

With the Right Strategy, Sellers Gain Trust, Stay Competitive, and Reach their Goals

As retailers tout price reductions to earn back consumer trust, the core focus must be on right-sizing indirect spend. This strategy is the only productive way to deliver shareholder value, maintain profitability, and deliver the quality and experience customers expect without sacrificing long-term goals or over-burdening associates. With the proper in-depth market insights, sellers can remain competitive and confident on the path of price-cutting while nurturing the current and future success of their business.

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