Pricing Software Comes of Age

Pricing Software Comes of Age

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May retailers in a wide variety of markets battle pricing strategies everyday. Take this example: three similar products (say digital cameras) are selling in a particular location, one for about $120, a purportedly better one at $150 and a top-tier one at $199. As is usually the case, the higher the price, the more the location profited.

The store’s more educated customers flocked to the $199 model while the more cost conscious went for the $120 model. The larger percentage of shoppers often ignored the middle one.

Enter the makers of a new breed of “price optimization” software like the most recent program from San Carlos, CA-based DemandTec Inc. (www.demandtec.com). After analyzing an array of variables, including sales history and competitors’ prices, the software might suggest cutting the middle camera to $139. While some mat argue that price cut may make the top tier digicam seem more expensive, the software retailer usually finds that the aficionados will still go for the $199 model while the cost-cutters won’t see as much of a bargain in the lower end model and many will make the move to the $139 camera.

While the above is merely hypothetical, the makers of this program claim the software is regularly credited with boosting profits and moving the product the retailer wants moved.

According top those that follow this industry, software like the programs offered by DemandTec are just beginning to make their mark. Although major software providers such as SAP AG and Oracle Corp. have joined the market, analysts estimate that no more than 150 retailers worldwide are using it – including such big names as Wal-Mart Stores Inc. and 7-Eleven Inc.

While current pricing strategies vary from store to store and industry to industry, they usually involve some form of the cost to the retailer plus a set markup to ensure a profit. Others might match a competitor’s price or replicate what they charged the year before. The way pricing software works suggests some products are simply more price-sensitive than others and shopping habits vary from location to location and state to state.

DemandTec claims at least one national electronics retailer they worked with was pricing batteries the same a all stores until optimization software showed that consumers in Dallas were willing to pay more than people in Boston. The data also revealed that Texans would buy a particular battery only within a narrow price range, while Bostonians were far less picky about it. The retailer altered its prices and subsequently sold more batteries. They claim that exact scenario is showing up is showing up in a wide range of products. We’ll be taking a closer look at the subject of pricing software in an upcoming issue of Picture Business.

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