From Art To Science: How Retail Analytics Can Assist With Price Optimization

Product Management

Every retailer understands the importance of price. Choosing the right cost can mean the difference between selling out of an entire shipment of products and struggling to offload a small portion of inventory. At the same time, it can also mean the difference between a profitable quarter and one in the red. Pricing requires merchants to walk a fine line between appealing to customers and maintaining profit margins.

In the past, pricing was viewed as an art, with retailers establishing product values based on their gut intuition and past business experience. Price management worked the same way, with merchants adjusting their rates depending on their perception of the existing retail climate. While intuition and experience have worked traditionally, just about every retailer has been burned by these tools as well. It isn't unusual for merchants using their guts to determine prices to get left with surplus inventory every once in awhile after a major shopping season.

Sure-fire pricing with eCommerce software

Over the past few years, many merchants began using retail analytics to improve their intuition and manage prices more effectively. Importing product data into a solution such as our eCommerce platform SalesWarp or a stand-alone pricing intelligence tool like the one from Upstream Commerce can help businesses turn art into science. By enabling retailers to take input from point-of-sale data and seasonal trends and optimize pricing across stores, the software ensures they get the most out of their inventory.

Pricing optimization has shown consistent results for retailers that opt to use these solutions. For example, one study by the Yankee Group suggests merchants can generate a return on investment of 20 percent after utilizing price optimization software to fine tune their product management.

More specifically, Babson Executive Education cites a case study of Canadian apparel retailer Northern Group Retail after it integrated pricing optimization solutions. The first year after implementing these solutions, Northern Group was able to increase gross margins by 2 percent, and that number hit 4.5 percent during the second year of use. On top of that, Northern was able to reduce the overall size of its inventory, suggesting it was making more money while also cutting back on expenses.

Department store retailer Kohl's noted similar improvements, observing a gross margin increase of 140 basis points. Unlike Northern, Kohl's felt pricing optimization brought a different perk to the table – the ability to improve sell-through rates.

Potential drawbacks

As is the case whenever new software is integrated into retail business operations, there may be a small upfront investment required to get pricing optimization solutions in place. Merchants do need to get accustomed to using these solutions, which takes time, and there will also be a financial investment to purchase a license.

However, as the case studies show, retail analytics and price optimization solutions are well worth the investment and can drastically improve profit margins. Whether implementing a stand-alone pricing tool or a complete eCommerce software solution that manages pricing, most retailers can begin to see benefits within months, even weeks thus generating a return on the initial investment rather quickly.

"Pricing optimization should ideally be undertaken along with other approaches to merchandising optimization such as shelf space and assortment management," the Babson study suggests. "However, the integration issues involved in end-to-end pricing lifecycle optimization, along with merchandising optimization, are considerable. This is clearly the direction in which retailing is moving given the potential for significant benefits."

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