Price Optimization

8/7/2019 Price Optimization

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THE STORYTerry Burnside chief operating officer of Longs Drug Stores (LDG) was doing one of hisregular walk -throughs.

Prices that normally ended in the usual digits-- .99 or .95 -- flashed random amounts like$2.07 and $5.84.

An item priced at $2.07 in Walnut Creek was

going for $1.86 at the Seattle store.



The oddball numbers are the product of Price-optimization Software



y Price-optimization software,is designed to generatethe ideal price for every item, at each individual store,

at any given time.y Maker s:

ProfitLogic Inc. in Cambridge

DemandTec, based in San Carlos, Calif. KhiMetrics Inc. in Scottsdale

www.sas.com



THE INNOVATION...

y PO's ancestors is the yield-management software thatgave a boost to the airline and hospitality industries inthe 1980s by squeezing profits from the last-minutesales of vacant seats and rooms



y Most big retailers have routinely underpriced oroverpriced the merchandise on their shelves.

y They generally set prices by marking up from cost, orby benchmarking against the competition's prices, orsimply by hunch.



y A price-optimization program,plugs reams of datafrom checkout scanners, seasonal sales figures etc,into probability algorithms to come up with an individualdemand curve for each product in each store.

y From that, retailers can identify which products aremost price-sensitive.

y Then they can adjust prices up or down according to

each store's priorities -profit, revenue, or market share-to achieve a theoretically maximum profit margin fortheir goals.





y DemandTec's algorithms, and not manufacturers'

suggested retail prices, now govern pricing in all 390Longs stores in the continental United States.



y S/w helped Longs maintain overall profit margins evenas the retailer increased special promotions.

y The technology has also triggered a "category -by-category increase in sales and margins," particularly innon -pharmacy sales, which generate most of Longs's

profits.



Client experiences..y D'Agostino's launched in all of its 23 stores a price -

optimization system similar to that used by Longs and itenjoyed similar success.

y During an eight -week test, D'Agostino's revenues jumpednearly 10 %, unit volume 6 %, and net profit 2%.

y ShopKo Stores (SKO) rolled out similar optimizationsoftware in its 141 stores after seeing a 24 % spike in grossmargins during a 6-month test.

y Recent study by Gartner and Retail Information SystemNews found that nearly half of retailers using price-optimization software expect it to bring a payback within 12months.



Uses of S/wy financial services, consumer electronics, and

transportation.

yCasinos are even considering such programs to findthe optimal payout for slot machines

y retailing



Retailers explore price optimization

y DemandTec client, Neal explains, began bargain pricing for price -sensitive product diapers togenerate store traffic.

y But after running sales data through the pricingsoftware, the client discovered that :

Most price-conscious diaper shoppers had long since

abandoned the store for bulk purchases at discounterssuch as Wal-Mart. As a result, the client raised priceson diapers, fattening margins without hurting sales ortraffic.



Retail chains who use the

sof twarey Wal-Mart

y J.C. Penney

y Best Buy y Home Depot

y Gap

y Staples



Obstacles in the path of optimizer

sof twarey The software is not cheap.

y A DemandTec s/w costs $1-10 million, depending on

the number of stores and the complexity of theinventory.

y This limits price optimization to large retailers.

y Psychological: The software requires users to accept,

on faith, pricing recommendations that are sometimescounterintuitive.



THANK YOU

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Price Optimization