Why 'Flash Boys' and pricing complexity matter to retailers

By Paula Rosenblum, co-founder and managing partner, RSR Research

     Paula Rosenblum

Michael Lewis's new book, "Flash Boys, A Wall Street Revolt" is a great read and certainly helps explain why Wall Street has seemed so finicky over the past few years with erratic, unexplained ups and downs getting way too common.

I'm not sure the ride is over, but I've had an epiphany or two from reading the book, and they have something to do with retail and the danger of the ever-increasing complexity caused by continual increases in the number of price changes in all channels.

According to Lewis's retelling, some of those bizarre stock swings were caused by bugs introduced into legacy software that had already become overly complex. Adding dozens of new types of trades, pretty much on-the-fly and mostly designed to enrich the financial intermediaries, broke the backs of millions of lines of code.

To illustrate the impact of complexity, Lewis draws a fabulous everyday analogy using the automobile and its habitat.

A car ignition key is simple, the car itself is complicated, but traffic patterns are complex.  It's easy to understand an ignition key (forget about ignition switches, I'm not talking about GM). It has a very specific function. The whole car is more complicated, but with enough engineering drawings, education and time, the right person can understand and manage it. Hence, cars are pretty safe and predictable. We may suffer breakdowns from time to time, but rarely are they befuddling.  

But traffic patterns, the cars' habitats, are chaotic. We may have the general sense that rush hour is busy while at midnight it's flowing smoothly. So we can usually predict travel times. But introduce new variables like accidents, heavy downpours or a snowstorm in Atlanta, and all bets are off. It's a rare and lucky person who can predict it, and adding more complexity while presuming to understand the outcome is borderline foolish.

It sounds a lot like today's retail pricing structure.

Each year, RSR compiles a benchmark study focused on retailer pricing practices and associated technologies. We've just released our seventh annual. Our goal is to understand the business challenges and opportunities in retailers' worlds that drive technology purchase and usage.

As we looked at the data gathered for this year's study, it became more apparent that the sheer volume and types of price changes executed by retailers within, and across selling channels, has become overwhelmingly complex. Not complicated, but complex, and their actual ability to drive sales and gross margin becomes questionable

We found a sharp increase in the number of price changes even as effectiveness to drive sales declined:

  • The number of price changes sent to stores and other channels continues to rise for 76 percent of respondents
  • The United States is unique in the number of promotions it runs. Forty-four percent of U.S. retailers reported they have become more promotions-driven over the past three years vs. only 17 percent of retailers in the U.K.
  • While 46 percent report the objective of their pricing strategy is to maximize gross margin, only 27 percent rate themselves as "very effective" in achieving their objectives. Sixty-two percent rate it "somewhat effective" – damning it with faint praise

Promotions are run by marketing, price management and markdowns are almost always run by merchants, and the combination can be toxic for the retailer.  

Amazingly, even with more price changes than ever, more than half of our survey respondents who self-identify as 'laggards' (defined by RSR as those whose comparable sales lag inflation) report they have no plans at all to implement enabling technologies to support end-to-end price lifecycle management and 41 percent report no interest in implementing a rule-based pricing engine.  Numbers for other pricing technologies are similarly disheartening.

So here we are, living in an era where retail pricing is becoming more and more complex (similar to that in "Flash Boys"). Yet many of us are flying without a technology net. RSR's survey respondents consistently highlight tough-to-change internal IT systems as roadblocks to moving forward with improved technology, yet they don't look to new systems to improve results. Potential effects are chaotic at best.

It's time for retailers to take a hard look at their pricing practices, most especially in the United States, where we've been in the grip of holiday promotional fever for the past several years. Surely there's a better way. Trying to run all these price changes without a clean technology implementation and an enterprise coordinating team for all pricing is a poor prescription for success.

Paula Rosenblum is co-founder and managing partner at RSR Research and is one of Vend's "Top 50 Retail Influencers" in 2013. Previous to her 12 years as an analyst, she spent more than 20 years as a retail technology executive and CIO at companies including Hit or Miss, Morse Shoe and Domain Home Fashions. She also writes a blog for Forbes.