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.
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.