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Sell More, Make More

New York grocery chain uses DemandTec software to sell more of higher-margin items
Manhattanites who shop at D'Agostino Supermarkets are short on time and hungry for specialty items and prepared foods, such as sushi, in every store. What they aren't as concerned about is price. That's why Nick D'Agostino III, whose grandfather founded the chain in 1932, is confident that customers will be satisfied by the company's recent decision to implement software that alters prices to sell more of those items that carry higher net margins.

The PriceCenter software, developed by DemandTec Inc., measures net profitability of individual items for sale and then adjusts the prices to sell more of the higher-profit items. D'Agostino, VP of corporate administration for the family-owned chain of 22 stores, says he's more concerned that his patrons leave a store feeling satisfied with what they've paid and not necessarily that they've paid less than on previous shopping trips.

"I'd rather a customer feel like we're more fair-priced. Hopefully, they've spent less," he says. But that might not always be the case. "What good is it for me to sell you something at half of what you think it's worth?"

The science behind this thinking relies on intricate algorithms and sophisticated customer-modeling techniques that combine point-of-sale purchase history, product attributes, promotions, and competitor pricing with high-speed computing.

But at some point, it all boils down to consumer psychology: How much will customers pay for that 64-ounce jar of cranberry-mango juice? The grocer ran an eight-week test of the software in 10 stores, and D'Agostino concedes that some of the results surprised him. People are willing to pay more for baby food with vegetables than baby food with fruit--so

he raised prices to reflect that. "Why shouldn't I do that?" he asks. Both items cost the same from the manufacturer.

During the test, the chain increased gross profit 2.5% while selling a greater volume of groceries than a control group of stores. The software ranges from $2 million to $15 million, based on the customer's revenue and the number of stores and categories in which it's implemented.