It’s been a testing period for many consumer companies thanks to inflation, manufacturing price spikes and supply chain pitfalls. All of which have translated to increased costs for businesses and which can’t be clawed back because simultaneously consumers are either cutting back or trading down to cheaper alternatives.

Inevitably, there’s only one way this is playing out: lower margins. Retailers generally already have low profit margins due to the nature of their businesses, especially brick-and-mortar retailers. High volume, low margin strategies are the accepted practice for many retailers but in difficult trading conditions, the volume is lower and margins can be forced down until they all but disappear.

According to KPMG’s UK head of retail, Paul Martin in Q1 this year, “With overall inflation running at around 10%, and food inflation sitting nearer 20%, total sales growth … of just 5% will be eating hard into retail margins and masking the true state of the sector’s health.”

Inflation takes its toll on consumers who face household increases in their food bills, fuel, energy, broadband, mobile phone, council tax bills on the horizon and so on. Consumers will continue to take steps to reduce spend where they can – switching where they shop, what they buy, whilst also cutting back on activities, such as eating out and takeaways.

Some of the more influential retail sectors have seen recent downturns in sales; footwear, clothing and accessories which are non-essential but typically buoyant, have seen consumers hold back. Furniture and homeware have been driving sales growth on the high street and online, but these are starting to struggle as household budgets remain squeezed. Electronic devices – especially the big ticket items – are similarly impacted, despite being typically resilient sectors. However, according to Euromonitor in its half-year update of 2023, affordable electronics products such as smart wearables, earbuds and smartphones will be relatively unaffected.

Manufacturers and retailers are also hit by rising costs in materials, supply chain, staff, energy, rents and so on. In fact, there are estimated to be some 248 different line items – or levers to pull – and consumer companies should have a plan to reduce each item by 10-25% over the next 24 months. Companies need to look at the price rise in every line item as a potential loss of margin and come up with strategies to cut those losses. It’s a stark message: if you can’t take costs out, you’ll see declining revenues.

One area where consumer companies retain some control is with their retail pricing strategy. As much of the growth in retail is being driven by inflation, price and promotional strategies have become increasingly important growth engines for retailers.

Customers are looking to cut costs and it might seem sensible to lower prices to bring in more customers by making the product more affordable. But is it right? What does it do to margins, does it lead to sales now, is it relevant, attractive, is there an added time-limited incentive?

Behavioural economics says that price has as much to do with psychology as it does with affordability: social status, limited supply, price anchoring, value and benefit all have a role in determining perceptions of price. Price will nearly always be part of the purchase consideration.

Slashing prices can stimulate customer interest and action, but it can also create immediate impacts elsewhere that are hard to recover from, such as price competition and devaluing brand perception. Not only that, but reducing the sale price also reduces the margin and becomes a brute force, blanket measure. And with the current pressures facing consumer companies, who can afford to lower the margins further still?

Instead, sellers can offer incentives to purchase; there are many different types, including gifts with purchase, trade-in of older products, and rewards of vouchers or cash, which are just some ways to incentivise a purchase. The complexity of promotions can be managed so that they are agile and responsive to market dynamics, but brands and retailers must be careful to insure themselves against unforeseen costs.

In contrast to price drops, promotions can be data-led to target potential new customers or segments, they can help a business to manage stock levels, attract new customers and revive flagging interest, drive sales for products at reduced risk to the customer, help companies maintain relevance with customers and maintain the margins on goods.

When commercial levers are managed well, companies are more likely to preserve and protect their consumer base while minimising negative impact on margins. Getting the approach to incentives right is a careful mix of art and science: one incentive-based sales campaign might be part of the long-term strategy using complex data to make forward looking decisions, and another might be set up, managed and closed over a short period to take advantage of an unexpected opportunity or to help shift inventory.

Sales and marketing teams within brands and retailers need to look at the mix of levers they can pull to get customer attention, stimulate interest and desire, and lead the customer to take action and purchase. There has never been a single lever but in the context of the 248 levers that can be pulled to cut losses, pulling the lever marked ‘promotions’ might be one of the fastest and most effective in protecting margins.