Fine-Tuned Pricing

Following a pilot test, kids' clothing outfitter Children's Place this week begins rolling out price-optimization technology for markdowns that uses hosted software from Oracle's ProfitLogic to analyze factors such as current sales data, profit margins, inventory, and historical performance for a specific item as well as similar merchandise. It adds to that external data on economic conditions, weather patterns, and competitor activity to tune its recommendations.

Every Sunday, each of the retailer's 753 stores sends sales, markdown, and inventory data on all items to headquarters in Secaucus, N.J. The data is sorted and forwarded to ProfitLogic, and by midmorning Monday, ProfitLogic has sent Children's Place markdown recommendations.

Using hosted software has cut down on integration and implementation challenges. Up front, Children's Place provided two years' worth of sales and marketing history, but now all it has to do to upload new info into the system is transmit a flat data file, says Scott Friend, VP of marketing and science at Oracle Retek Global, the division of which ProfitLogic is now a part. Companies also can buy ProfitLogic's software and deploy it internally.

Apparel planners don't have to heed the discounting advice they get from their systems. The markdowns that Children's Place approves are input into the system via a proprietary back-end price-management system running on DB2 from IBM into Triversity Inc.'s point-of-sale software, which runs the cash registers. In-store personnel also receive a printout of markdowns they use to reprice the sales tag on garments. By Wednesday, items start ringing at the new prices. Children's Place declined to disclose how much money it has spent on the effort.

Part of the reason price optimization is rising in popularity is that increased computing power makes it more practical. When ProfitLogic began building the intellectual property for its price- and promotion-optimization software 15 years ago, "we would have had to dim all the lights in the Boston area just to run one optimization for one customer, because you're talking about hundreds of thousands of items across hundreds or thousands of stores," Friend says.

In 7-Eleven's case, it involves up to 3,000 items in 5,381 company-owned stores in the United States. The company moved from a proprietary price-optimization tool to Khimetrics Customer Demand suite for the strength of its what-if analysis that could factor in even the complexities of states' tax laws in helping the retailer set prices. That's a challenge: "Do you know we have more than 150 taxes just for cigarettes?" asks Kay Trapp, 7-Eleven's manager of merchandise pricing

The commercial software handles the bigger questions with greater efficiency. Before, for example, the company could figure out how many units of a particular product it would have to sell to make up the gross profits it would lose if a supplier raised its prices. But now, the Khimetrics tool gives it a new way of looking at that scenario, because it can estimate how sales will be affected if the cost is passed on to customers, Trapp says. "The Khimetrics software makes it easy to determine the exact impact on unit sales associated with a price change, instead of guessing," she says. "That's because the what-if analysis has become more intelligent."

7-Eleven benefits from a well-integrated infrastructure that simplifies the process of sending data to the price-optimization system. Under the company's Retailer Initiative system, sales-tracking, inventory-management, and supply-chain systems already are integrated to allow store managers to maximize in-stock levels, minimize in-store inventory requirements, and identify store-specific demographic trends. At each 7-Eleven-owned location in the United States and Canada, the transaction log is fed through the point-of-sale system into a custom Oracle data repository managed by EDS. Unit sales, costs, price, and competitive prices are pulled weekly from this data warehouse into its price-optimization system from Khimetrics and sorted by location. Built into the workflow is a review process so merchandising managers approve all recommended markdowns and promotions before transmitting them to stores.

Vendors point out that the promotional planning capabilities of price-optimization software let retailers explore the effects of campaigns beyond a single product line, as well. "If I'm offering a promotion on hot dogs, the applications can tell the retailer what effect the sale will have on buns, mustard, ketchup, relish, and other related products," says Paula Natoli, senior manager for solutions management at Manugistics, whose suite of applications for price optimization include Networks Precision Pricing and Network Markdowns. "It tells me how the 20-ounce bottle of ketchup will sell if I promote the 16-ounce."

RadioShack has found that price-optimization software from DemandTec Inc. helps with assortment planning, advertising, and, most important, understanding the customer. The electronics retailer adopted DemandTec's pricing software in 2003 and is in the process of rolling out the promotion and markdown-optimization modules, Alex Hoff, director of strategic pricing at RadioShack, says in an E-mail. The software lets RadioShack gain an understanding of demand for electronics from cellular phones to cables to connectors, and whether staff at different locations need better store displays or more sales training, he adds. DemandTec's maintenance services cost about $1 million annually.

That may sound like a steep item on the yearly budget, but it's clear RadioShack considers it the price of success. A growing number of others in the retail industry seem to be coming to the same conclusion.

Illustration by Mirko Ilic

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