Price Optimization Software Big in Retail Business

prostoalex writes "Even if you spent only a single day in an economics class, you're probably familiar with a concept of supply and demand. The Associated Press is running an article on retailers employing mathematical models for price optimization, where some products are priced higher to generate higher margins, and some are discounted to generate larger volumes even at the expense of per-product margins. DemandTec, Oracle and SAP are some of the companies producing those mathematical models for retailers around the country, with AP listing some of the pricing optimizations employed currently."

Comments

before all the "duh" responses

[acvh]

this is more about consumer behavior than straight economics. the optimizations referred to aren't just adjusting pricing to supply and demand, but, as noted in the article, address perceived value as well. I'm no economist, nor do I want to be, but it seems to me that such analysis can uncover otherwise unexpected responses to price adjustments.

So what is new?

[figleaf]

Lots of companies have been using it for a long time.

I have used a prize optimization solutions based of MS SQL Server back in 2005
http://www.microsoft.com/industry/retail/solutions /priceoptimization.mspx

Re:Why this is good for everyone

[slk]

In your description of the extended warranty racket, you have just describe Apple's business model. You buy something expensive and of marginal quality (sorry, apple's hardware build quality is awful, though OSX is really nice) and then you have the big upsell to Applecare (takes care of everything for 3 years).

Watch out for customer "value" cards

[argoff]

You see. A lot of stores would like to charge each and every customer a different price. Those prices being the set that maximizes revenues from that particular customer. But in practice that is very difficult. Changing differnet prices on the same item for every sale would be cumbersome, and customers who see the person in front of them get a better deal than they do might get pissed. The stores response to this is customer "value" cards.

In an idea scenario, they set all prices on the high end - but then give the customers "value" cards that offer varing discounts and rewards so as to optimize sales and profit. For example, if they know you won't pay more than $2 for a soda, then your soda will always be $2. For example, they might do something like use buying habits track your period. If you buy tampons on the day of your period - you will get reamed hard because they know you need them right now, but if you buy them in the off cycle then you get a good deal. If you buy just milk in the early morning, you will get reamed hard because they know you might need it for breakfast right then, but if you buy it later on you will get a competitive discount. If you buy a phone today, but the last phone you bought was two years ago and had a two year average lifespan, then you get reamed hard because they know you need a replacement right now. Otherwise you get a deal. If you buy condoms on friday night, you get a nailed hard, but if you buy them on wednesday morning you get a great deal.

Re:Watch out for customer "value" cards

[wkitchen]

And how is that going to affect buying decisions when the buyer doesn't know about it until checkout time?

If the gallon of milk is marked $4.99 on the shelf, the customer who is unwilling to pay more than $3 is not going to put it in his cart. That the store plans to discount it to $2.99 at the register won't change that. And if the customer is willing to pick up the $4.99 milk, what incentive is there for the store to charge less for it?

Re:Quick - someone patent it ...

[costas]

That's not price optimization: that's discriminatory pricing or price differentiation. The latter is usually done with coupons ("here's a $100 loyalty coupon for you Mr Smith"), the former is about maximizing profit (i.e. profit per unit times total units sold).

Yes, I am a supply chain consultant...