Price Optimization Software Isn't Cheap, But It's Worth It, Says Study

FRANKLIN, Tenn. -- There is a clear link between the use of price optimization software and improvement in gross margins, according to a new report, Price Optimization -- A Retailer's Guide, released today by IHL Consulting Group.

The technology doesn't come cheap, however. Packages begin at about $500,000 and move up from there, which explains why 85 percent of its users are retailers with sales in excess of $1 billion annually. But with an impact to gross margin touted between 3 and 15 percent, Tier 1 and Tier 2 retailers are evaluating the technology as well.

Some recent retail successes for price optimization software include:

-- Big V Supermarkets increased revenue 9 percent, unit volume 6 percent, gross profit 6 percent and net profit between 1 and 2 percent in a portion of its pilot, with its forecast accuracy exceeded 90 percent. Big V Supermarkets uses software from DemandTec.

-- D'Agostino Supermarkets v.p., Nick D'Agostino III, said that an eight-week, 10-store, 13-category pilot of DemandTec's price optimization tool last March produced unit-volume gains in the categories tested of 6.2 percent, with dollar sales climbing 9.7 percent. Gross profit rose 16.1 percent and net profit 2 percent.

-- Khimetrics reported an anonymous grocery chain increased profits more than 12 percent, while its sales increased 4 percent during its first pilot of Khimetrics price optimization tool.

Based on the study, IHL listed several recommendations for retailers venturing into price optimization including:

-- The importance of using clean historical data.

-- Running a pilot to provide guided instruction into the use of the software within the retailer's business.

-- "Exercising" the software; a retailer must be prepared to look at a variety of pricing schemes, region, and product categories to find the best mix for its business. Finding the best mix for a particular retail organization may not come with the first iteration.

-- Being prepared to execute on the results; once the price optimization software makes its recommendations, systems must be in place on the output side to execute pricing changes.
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