Price optimisation will be the next wave of technology to
hit UK retailers and present a challenge to their IT departments,
according to industry analysts.
Price optimisation technology, sometimes referred to as retail
revenue management, provides a way for retailers to be more
flexible with pricing, promotions and forecasting. The technology
allows them to react more quickly to market conditions.
It does this by monitoring customer demand, measuring how a price
is perceived - whether too high, just right, or too low - relative
to other retailers, and optimising prices and promotions to meet
business aims.
Unlike older types of price optimisation software, which were based
on rules, modern applications use advanced statistical modelling,
data mining, pattern recognition and optimisation techniques
designed to achieve merchandising, financial and operational goals.
Many of these techniques are proprietary.
In a paper on price optimisation released in May, AMR analyst Greg
Girard identified the main software suppliers of price optimisation
products as ProfitLogic, DemandTec, KhiMetrics, and Spotlight
Solutions. He said, these companies account for 80% of the market.
Other software makers that offer price optimisation products
include i2 Technologies and Manugistics.
Girard warned that to deploy price optimisation successfully,
retail IT managers should aim to collect at least a year's worth of
data on pricing and shop-floor inventory.
Price optimisation software links into existing company systems,
such as forecasting, mainframes and ERP applications, without the
need for significant extra investment, according to analyst firm
GartnerG2.
Hung LeHong, a retail IT analyst at GartnerG2, said retailers could
reap a number of benefits by combining price optimisation software
with electronic shelf-edge labels. For instance, this would enable
them to respond more quickly to changes made by competitors.
But LeHong warned that a price optimisation strategy would only be
effective if store managers understood and implemented the
policy.
"When retailers implement a new headquarters-based analytics or
optimisation capability, they sometimes underestimate the effort
required to turn the insight into action at the store," he said.
"Without store execution, the most sophisticated optimisation tools
can become worthless."
Last week, Computer Weekly reported that supermarket chain Safeway
was planning to roll out price optimisation software and electronic
shelf-edge labels across its 480 UK stores during the next year,
following a successful trial of the technology.
The technology, based on software from KhiMetrics and electronic
shelf-edge labels from NCR, will be used to underpin the retailer's
high-low pricing strategy, which involves running frequent
promotions that offer temporary deals and savings to consumers,
while maintaining margins on other items.
LeHong said this strategy would be impossible to execute without
the new technology.
"When Safeway decided to shift to high-low pricing, it effectively
doubled the number of price changes headquarters staff would be
making to several thousand items per week," he said. "Existing
processes for executing price changes in store were largely a
manual affair, requiring significant labour hours and sometimes
leading to costly errors."
Price optimisation software should be viewed as a decision support
tool, rather than a black-box decision-making system, LeHong
said.
"It can be disconcerting for pricing analysts to trust a computer
to make pricing decisions when they have always relied on their
market savvy," he said. "At Safeway, the analysts took time to
understand and test the pricing elasticity logic. This built the
trust they needed to feel comfortable using the tool in their
pricing decisions."