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For price optimization systems to work, they must be filled with a retailer’s data on sales, pricing and inventory, including the length of time it took different SKUs to sell out. The largest part of this data transfer comes during implementation, when a retailer must retrieve three years of data on pricing, sales and inventory and send it as an electronic file to the software company. The transfer of three years of historical data typically requires an employee to transfer files once a week for about six weeks, retailers say.
Each with a niche
In a new market without deeply entrenched suppliers, pricing optimization software vendors are carving out niches. ProfitLogic and Spotlight Solutions cater mostly to apparel retailers, though ProfitLogic is developing optimization software for professional merchandise buyers and for merchandise allotment. Spotlight Solutions, while sticking to pricing optimization, says it’s focusing more on providing users with analytical views of the thousands of SKU pricing options they might want to consider at any one time. “It’s all about creating pricing scenarios, but how do you manage 5,000 SKUs without having to go through all 5,000 items? We make it easy to look at groups in any fashion, such as if you want to create two or three pricing alternatives to what the software recommended,” Sinclair says.
KhiMetrics and DemandTec focus on grocery and goods with short lifespans, though DemandTec has been expanding its customer base. RadioShack Corp. recently agreed to deploy the DemandTec 3a software to set prices and promotions in more than 7,200 stores. DemandTec’s other clients include H.E. Butt Grocery Co., Longs Drugs Stores Inc. and D&W Food Centers Inc.
KhiMetrics also concentrates on pricing optimization for promotions. Its software lets retailers analyze how well promoted and non-promoted products sell and how they sell in relation to each other. For example, it offers a basket analysis that records information for each item scanned in a shopper’s basket, then reports which products were purchased along with promoted items.
Marketswitch focuses on marketing, using data on customer relationships to come up with prices geared toward particular customer segments in different selling channels, the company says.
As retailers develop their use of optimization technology, they’ll move more toward systems that utilize both merchandising and pricing optimization tools, improving the movement of goods throughout their merchandising lifecycle. “The Holy Grail is to match merchandising and pricing optimization, so that you bring in the right stuff and price it right from the beginning,” says Boone of IDC.
Long, great winter
GSI Commerce Inc. is already doing that with an in-house developed web-based inventory management and merchandising optimization system designed to maintain strong margins on seasonal apparel. “We just came off a great winter, even though it was long, because we knew where our business was trending,” says Matthew Hoffman, divisional merchandise manager for GSI Commerce.
GSI operates online stores for The Sports Authority and other sporting goods retailers as well as for the Denver Broncos and other sports organizations. Using historical data on product sales and inventory movement, it was able to better control inventory levels for different products throughout the winter. And by combining those data with recommendations from its pricing optimization system, GSI maintained strong margins throughout the season. “As a result, our sell-through was much better,” Hoffman says. “We knew which product types, styles and brands to sell and were able to keep prices higher to get better margins.”
He adds that the system continues to get better at recommending prices and inventory levels as it works with a more extensive history of customer buying behavior. GSI integrates its optimization software with the inventory management system within its retail management software suite from JDA Software Group Inc., which provides it with automated updates of inventory levels.
Once price optimization becomes integrated into retail networks, the technology could have far-reaching effects on store operations, analysts say. For instance, electronic store shelves could become endpoints for receiving and sending data. The UK’s Safeway Stores plc is already testing electronic shelf label technology from KhiMetrics in 50 stores. Not only will the labeling systems make sure that product shelves and POS systems are using the same prices, but, using radio frequency identification technology, they’ll also send an alert to an inventory system every time a product is removed from a shelf-an information flow that will further enhance price optimization systems with information on how quickly products fly off shelves at which price. “That’s not that far away,” predicts Tim Manning, vice president of marketing for KhiMetrics.