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European Markdowns & Promotions: the new EU Omnibus Directive

Guidance on the new Price Establishment regulation

New pricing regulation requires adjustment, while opening up the opportunity for greater fairness and transparency

The New European Union Pricing Directive

new pan-European legislation (EU directive) is gradually rolling out; starting July 1, 2023, Italy will also adopt it, while other countries are doing the same around similar timelines. It’s happening right now. Arguably, there is some confusion and misinformation about it, so let’s shed some light.

Our legal partners provided a review of the new rules, so we are able to share a brief summary of our understanding and implications; this naturally is not a binding legal opinion, but just a structured summary of our learnings.

The relevant EU legislation is mainly from 2019 and 2021, and it will be gradually implemented at the national level with some margins for local interpretation. Regardless, many principles remain in common. The legislation specifically regulates price “announcements”, therefore advertising and price tags. It does not limit “price changes” in any way, nor price comparisons with other products or brands, nor claims on specific or relative convenience. This innovation will only affect how prices are shown and advertised.

Reference Price

Technically: the main novelty consists of identification of the reference price, established as “prior” based on the lowest sale price shown over the previous 30 days. If an item had received a publicly available price reduction in the previous 30 days, then any ad/tag must also contain at least that price, unless it was a gradual and ongoing reduction.

Commercially:

  1. If the price reduction was not available to the general public, but only for example to “some” loyal customers (and not “all”), this would not create a new reference price
  2. If the reduction is gradual and uninterrupted, so for example it goes from -20% to -30% without interruptions or mid-point increases, then the original price remains valid
  3. If the article is less than 30 days old, there is a certain degree of autonomy for the member states to determine the minimum period of reference, so this will require case-by-case analysis by country
  4. It is lawful to show more than one price, albeit possibly complex or confusing to the customer: for example “-20% off the last discount which equates -50% off the original list price
  5. The rule might result, especially in its first few months, in verification attempts against competitorsmore likely than challenges from consumers to retailers.

Business Science Implications

Clearly, having to show 3 or even 4 prices on a price tag, or public ad, or e-commerce/store front, would not be desirable, and might throw science-based models off. How can such a complex and unknown modelling challenge be avoided?

However, for end-of-life markdowns this seems to be reasonably manageable using common sense and a little extra care, especially in the first season. On the other hand, greater attention may be needed regarding “in-season” promotions.

So as long as promotions in the 30 days prior to marking down products are targeted to loyal customers, like “exclusive pre-sales ” access, or seamlessly carried through the first day of markdowns (where lawful), then the new regulation should not require any change compared to the business rules established in the prior years.

Furthermore, for in-season promotions where each product is not discounted more than once over a 30-day window, but different promotions are focused on different products (as they should!) then again no implications for merchandising and no change to business rules will be required.

International Context

From a broader perspective, New Zealand seems to be the odd one out as the country with sticky price establishment rules that have stood the test of time.

Elsewhere, we have rarely seen price display regulations that end up in much more than a “cookie” type result, i.e. an extra hassle but not a radical change of business practices over the long-term.

Short-term, we expect ambiguity and different interpretations as the new regulation finds its way into daily practice. Plan early where possible; some extra care may make things manageable and pay off handsomely, creating a more transparent and fair marketplace that is less confusing for consumers and more profitable for retailers.

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About Evo Pricing

Evo is a leading London and Turin-based tech company that uses AI to optimize supply chain, pricing, and customer decisions. Since 2015, Evo has helped clients leverage Big Data to increase the customer relevance of business decisions, which helps reduce waste, optimize market efficiency, enhance product availability, increase margin and raise service levels. Evo’s algorithm started as Evo CEO Fabrizio Fantini’s PhD thesis, as a way to address limits of traditional pricing software. Since then, Evo’s applications have increased in sophistication and accuracy, as well as scope, with autonomous solutions covering price management, markdowns, forecasting, customer scoring and replenishment.

About the author

Fabrizio Fantini is the brain behind Evo. His 2009 PhD in Applied Mathematics, proving how simple algorithms can outperform even the most expensive commercial airline pricing software, is the basis for the core scientific research behind our solutions. He holds an MBA from Harvard Business School and has previously worked for 10 years at McKinsey & Company.

He is thrilled to help clients create value and loves creating powerful but simple to use solutions. His ideal software has no user manual but enables users to stand on the shoulders of giants.

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