April 30, 2003, 12:00 AM

The right price bulls-eye

Web-based price optimization is boosting retailers’ margins by preventing them from chopping prices too soon.

When a $99.99 winter jacket wasn’t selling as rapidly last holiday season as Northern Group Retail Ltd. merchandise managers planned, they contemplated a 30% markdown. But first they ran their plans through a new web-based pricing optimization system that the Canadian-based retailer had installed just a month earlier. The word from the system: hold steady. “We took the recommendation and sold the balance of the jackets at full price,” says CFO Michael Stanek.

The success in holding onto the full price was especially helpful because of a directive from Stanek to boost margins. “We’ve targeted to improve our gross margins by 2% a year over three years,” he says. He expects the web-based price optimization system-which sits on a web server on the corporate intranet-will account for half of that margin improvement.

Northern Group and a handful of other retailers are at the head of the curve on new web-based price optimization software, which in the past year has begun to replace traditional-and more cumbersome-methods of figuring out the best way to price merchandise in order to sell it within a planned schedule.

Guts and spreadsheets

Merchandisers strive toward improvements in pricing strategies by wrestling to gain better control of their markdown activity-a laborious and time-consuming chore that has been largely made up of veteran merchandisers’ gut instinct after poring over inches-thick spreadsheets of POS and inventory data for thousands of SKUs. A new crop of web-based price optimization software is letting retailers trade in their paper spreadsheets for software that applies mathematical algorithms to back-end data on pricing, merchandise sales and inventory levels, and recommends prices for particular SKUs. “Merchandisers and buyers have a certain level of intuition, but when you try to look at all the different combinations of pricing options, it gets beyond the ability of the human mind,” says Chris Boone, analyst with researchers IDC.

Retailers lose more than $200 billion every year to markdowns, according to the National Retail Federation and the U.S. Census Bureau and an analysis by vendor ProfitLogic. STS Market Research reports that 78% of all apparel sold by national retail chains is marked down. Because retailers usually operate with a budget on how much they can afford to lose on markdowns, the software helps them choose which recommended prices to accept by enabling them to conduct what-if analyses.

Providing retailers with all that information and analysis easily runs into millions of dollars a year in software fees. Yet Northern Group and other retailers express confidence that these systems will produce quick returns on investment. “We think we’re headed for an ROI within a year,” Stanek says.

If it weren’t for web technology, this combination of software performance and user ROI would be virtually impossible to implement without more costly and disruptive changes to a company’s computer network infrastructure, software providers say. “The web makes this all easier to implement, and deployment is far simpler and faster than it would be without it,” says Richard von Hirschberg, vice president of product management for ProfitLogic, which provides the web-based pricing optimization software used by Northern Group and several other retailers. “Without the web, we would have to set up a separate network infrastructure for each customer, making it too costly for them to realize a return on investment.”

He notes that retailers have the option of deploying ProfitLogic either as a web application hosted by the vendor or on their own web servers, as Northern Group has done. Either way, the web-based technology provides for a relatively fast implementation within about 12 weeks.

In addition to speed of access and ease of implementation, the web provides another benefit in allowing retailers to adopt price optimization software without disrupting their existing systems, Boone says. Thus vendors get a strong sales pitch to retailers that they can deploy a price optimization tool and begin improving margins in a short time without changing their infrastructure. “The merchandise managers don’t have to take a back seat to IT plans already in the works,” he says.

Northern Group never attempted to manage its markdowns before deploying the ProfitLogic system last year because it would have been too time-consuming and labor-intensive to be worthwhile, Stanek says. “We didn’t even go through this process of forecasting pricing or going back to look at historical sell-through rates,” he says. “All the data has always been in our system, but to use it we would need to employ 30 pricing analysts.”

Northern Group, which operates 280 apparel stores across Canada as well as a retail e-commerce site for the U.S., began deploying its price optimization system last fall and had it operating in time for the holiday shopping season. In addition to the software, which costs about $1 million to implement, Northern Group invested in a web server and dedicated two employees as pricing analysts to work directly with the ProfitLogic system. Employee training, which takes about two days, is included in the cost of the implementation. Although Stanek declines to give the cost of the web server, he admits it’s a big expense. Nonetheless, he sees a quick ROI from the price optimization system. “It had a big impact on the gross margin dollars we generated for the holiday season,” Stanek says.

Beyond hype

The tech-hype of the late 1990s made many executives skeptical about technology claims. But the fact that a growing number of retailers is moving toward pricing optimization technology is overcoming skeptics’ defenses. At a time when business at large has been slow to invest in new technology, more companies-and particularly retailers-are looking at web-based price optimization software and finding room for it in their spending plans. “It can be purchased as a software module without rebuilding network infrastructure, it’s not hard to implement, it’s browser based and it offers a quick ROI,” Boone says. “That’s what retailers are looking for today. Although it’s still a small, emerging market, pricing optimization software is definitely an area of high interest. Once IT budgets start to grow again, this will become attractive as an IT investment on a broad scale.”

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