Slashdot Mirror
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."
Customers vary in their willingness and ability to pay. If a company charges one simple price for each item, it creates a situation in which some people get a great deal (they pay less than they might be willing to) and some people don't buy the product at all (because the price is more than they want to pay). But if a company can find a way to separate the customers that really value the product from the customers that value it less, then more people will be able to buy the product and the company will earn more profit. (You mathematically prove that this increases what is called consumer surplus which is the equivalent to the consumers "profit" on the purchase and the seller's profit). Both side benefit, as does society.
The amusing fact is that this is nothing more than a capitalist version of taking from the rich (those are willing and able to pay more) and giving to the poor (those aren't willing or able to pay more).
Two wrongs don't make a right, but three lefts do.
I wonder how much this software costs. Does everyone pay the same price for it?
The more you regulate a company, the worse its products become.
2) Never look at the products at eye level, they are the most expensive and worst value.
That is really not a valid statement, for a couple reasons. The first error is the last two words 'worst value'. Only the customer can determine what the value is. If I'm looking at a condiment section and at eye level is a name brand catsup, and below it is a private label equivalent, the price per unit will probably be lower on the private label. That doesn't necessarily make it a better value. If I think the private label tastes rotten and wont eat it, the more expensive catsup is a much better value.
The second issue is that quite often what you see at eye level is determined by who payed for the placement. It may not be the highest margin item for the retailer on its own. But it is their because the vendor payed a royalty to have it where they want it.
3) Move as fast as you can to the back of the store. Start at the back of the store and work your way forwards.
That doesn't make a whole lot of sense. If you are talking grocery, very few stores are laid out the same way. There's no way this can be a 'rule' that will help you when what is at the front or back will vary from location to location. I think a better way of looking at this might be - don't buy what is on end-caps and floor displays until you have looked at the prices for comparable items. This means, not running to the back, but going to the aisle where the item is normally located.
In larger stores this really doesn't make sense. If I go to Fry's Electronics and run to the back, how does that help me? If I go to Best Buy and hustle right back to home appliances, I'm not sure what I've done to help myself out.
The psychology of all this is over rated. A little common sense - like many of the other suggestions in the list, will go a long way. That's not manipulating the 'system' it's just using your mind and operating above a visceral level.
It's hard to believe that's how Micronians are made. Why don't we see it right now by having you both kiss one another?
First, a disclaimer. I was employee #4 at KhiMetrics, the company founded by Ken and Tim Ouimet (employees #1 and #2). They're mentioned in TFA. SAP bought KhiMetrics in January of 2006. Ken had been my office-mate in grad school. That said, I haven't seen Ken and Tim in years, and I have no financial stake in KhiMetrics or SAP anymore (SAP bought out the KhiMetrics stockholders with money, not shares of SAP stock).
Yes, it's true that humans doing pricing try to do the same things. But the thing is that software can do things a human mind cannot. Yes, the opposite is also true, but here software has a lot of advantages. In the case of the KhiMetrics (now SAP) software, it works on the category level, optimizing profit for the category as a whole, which can include taking losses on individual items. The software never makes the common mistakes human beings make. For example, different "flavors" of the same size package of the same product should come out at the same price, and the unit price of a given item should go down as the amount bought increases. I can tell you that I have seen examples where humans have screwed this up this week. When there are two sizes of a given product, let's say a certain laundry detergent, then the price per weight of the larger package better be less than the price per weight of the smaller package, or there's never any incentive for the customer to buy the larger package. Still, I see examples where the pricers have gotten this wrong. I've even asked people at the stores if they were trying to move the smaller packages because of having too much of that size in stock or something, and they told me that no, they had no such problem.
The other thing is that the KhiMetrics software uses actual sales data to determine how sensitive the customers are to the price of a given product. This can be done down to the SKU (individual item) level in the product dimension and down to the level of customers of a specific store in the geographic dimension. In other words, the KhiMetrics software is capable of determining the sensitivity of the customers of each individual store to the price of a specific product. No human being could do that at all, much less in the time the KhiMetrics software can do it. Even with a pricing team for each category in each store, which would end up costing a fortune in human resource costs, the result would not be as good as what KhiMetrics can deliver. Additionally, since the Ouimets "grew up in retail," the KhiMetrics software, since the beginning, has been compatible with things like Category Management and Efficient Replenishment, and able to take into account things like having different goals for different products in a category (loss leader, profit generator, traffic generator, etc.). The software takes into account complex factors like seasonality, promotion, and product visibility. Since I have a reasonably good idea of the internal workings of the software, I can tell you with some confidence that I, a Ph.D. in theoretical physics, would not even want to try to tackle the problem of optimizing the prices for a subcategory of 20 products in a single store, much less the dozens of categories and tens of thousands of SKUs in the dozens of stores in a retail chain. KhiMetrics can do all that, basing itself on years of actual sales data, before breakfast.
There are experienced people in retail who are good at such things, but the software was created with people that have the same level of understanding of retail pricing, plus it has all the advantages of being able to do high-speed computerized analysis of huge amounts of price and sales data. I don't work for KhiMetrics anymore, nor for SAP, but I can say that if I were working in a retail company, I would definitely want us to be using software like this for pricing. And experienced retail people agree with me. One thing we saw back when I was with K
"It is nice to know that the computer understands the problem. But I would like to understand it too." --Eugene Wigner