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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.
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The oddball numbers are the product of Price-optimization Software
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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
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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
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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.
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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.
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y DemandTec's algorithms, and not manufacturers'
suggested retail prices, now govern pricing in all 390Longs stores in the continental United States.
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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.
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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.
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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
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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.
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Retail chains who use the
sof twarey Wal-Mart
y J.C. Penney
y Best Buy y Home Depot
y Gap
y Staples
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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.
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THANK YOU