New Pricing Rules for Retailers

New Pricing Rules for Retailers

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A new price-optimization software produced by a Silicon Valley firm called DemandTec may be changing pricing strategies at retail. The software actually uses complex math algorithms coupled with specific data on a retail location’s customer base to come up with a very specific pricing strategy on all the products in a given store.

For example, DemandTec reports a very specific pricing victory for New York’s popular Drug Chain, Duane Reade. With diaper sales struggling recently, the company dumped all their sales data into the DemandTec software hoping it would suggest how to price diapers so the sales number would pick up. The software spent a few minutes calculating the data and the Duane Reade computer finally suggested the drug chain do something it had never done before: make the markup on the diapers a function of the child’s age. For example, make the newborn sizes more expensive, and the big-kid pull-ups cheaper. After a year, an increase in diaper sales helped boost baby care revenue by 27% even as the category’s gross margin rose 2 percentage points.

“Markets aren’t homogenous, and pricing should reflect that,” DemandTec’s 45-year-old chief executive, Dan R. Fishback was recently quoted as saying. He also sees a shift in retailing away from a real estate game––duplicating stores to follow population growth––to a tailored approach for every neighborhood.

Best Buy is yet another large chain having some solid success with the DemandTec software. The retail giant recently explained that their pricing strategy was one of pouring over an Excel sheet and subsequently pushing prices out to the chain’s stores. With DemandTec they now pull data from each individual store and couple it with the DemandTec software. A store’s planners can also get to their DemandTec data via the Web and play with price combinations for most items in a store. Best Buy claims their margins have increased significantly since the move to DemandTec. The chain is even considering using the software to determine price changes within 24-hour periods, pondering if a shopper who picks up a digital camera after work would pay more than one who walks in at 10 a.m. on a Wednesday?

The software also analyzes and considers factors other than price in an attempt to boost sales. At one drugstore chain, DemandTec software noticed that cold sufferers often bought tissues, cough remedies and chicken soup in the same visit. So, the software suggested the retailer move some soup and tissues to the cold aisle. And so it goes.

While retail will always need smart people watching trends and outside influences to help set prices, a software like DemandTec’s appears to possibly be picking up where the human brain leaves off.

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