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."
This was first published in October 2003