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The Art, Science & Software Behind (Optimal) Retail Pricing - Part 5

Written By: Predrag Jakovljevic
Published On: January 27 2010

Part 1 of this series expanded on some of TEC’s earlier articles about companies’ need for better pricing management and optimization practices. This series, which focuses on the complexity of pricing and promotions in retailing, was inspired by JDA Software’s recent “edu-nouncement” on leading retailers consumer-centric pricing and promotions strategies, and by Revionics’ recent (and still ongoing) educational series of Web-seminars.

Part 2 analyzed some common retailers’ practices and explained the frequently used vernacular terms. Then the post went into the building blocks of pricing optimization, starting with setting optimal initial (everyday) prices.

Part 3 analyzed the other two building blocks of pricing optimization: promotions and markdowns. Then, the post went into the next generation of pricing optimization according to JDA: Lifecycle Pricing.

Part 4 continued the series by analyzing the pricing optimization vendor landscape, and featured the next-generation pricing optimization approaches of two on-demand software specialists, Revionics and DemandTec. Coming at the heels of the National Retail Federation’s (NRF) BIG Show 2010, Part 5 will conclude the blog series by further analyzing the retail pricing optimization vendor landscape and other vendors’ approaches to the next generation of pricing optimization solutions. 



Competitive Landscape

The current principal competitors include on-premise enterprise software application vendors such as JDA, SAP, and OracleJDA’s Price and Promotion Management retail solution was analyzed in Part 4. We should note here that Oracle’s Markdown Optimization product is offered hosted or on premise.

Oracle continues to have the strongest offering for softline (apparel) retailers, a space in which DemandTec and Revionics do not actively compete today. The current Oracle Retail Price Optimization suite leverages the acquired ProfitLogic assets and demand intelligence approach, which gave Oracle leadership in the markdown optimization space. Oracle has since invested significant development dollars to extend this intellectual property to everyday price optimization and promotion optimization.
 
Needless to say, Oracle has greatly expanded the technical depth and available resources, and significantly improved the sophistication of the development environment in terms of architecture, user interface (UI), and testing.  Since the ProfitLogic acquisition, Oracle Retail has fleshed out its price optimization suite with the Regular Price Optimization (for every day pricing) and Promotion Planning and Optimization modules. 

In addition, Oracle has delivered the Size Profile Optimization solution, which has unique capabilities (i.e., it is likely that some “fat” cities will sell much more extra-extra-large T-shirts and pants than their “slimmer” counterparts). As examples of recent wins, Nordstrom (see press release) selected the Oracle Retail Size Profile Optimization offering and Belk signed on for Markdown Optimization (see press release).

This portfolio allows Oracle to offer analytical insight and optimized decision-making at every point in the product lifecycle. Importantly, Oracle believes to offer a several unique differentiators in its approach to lifecycle pricing: 

  1. Oracle’s pricing solutions are specifically designed to meet the needs of each key retail vertical (hardlines, grocery, apparel); As mentioned earlier, DemandTec and Revionics do not actively compete in apparel today

  2. Oracle’s pricing solutions provide flexible and modular deployment options to help retailers address immediate pricing needs with the ability to “add on” modules as business needs evolve

  3. Because of Oracle’s robust footprint across pricing, planning, supply chain management (SCM), and store execution solutions, Oracle can offer “true” lifecycle pricing by ensuring that price decisions and optimization recommendations align to overall financial planning goals and that they are balanced through downstream supply chain activities and in-store execution via a common demand forecast that is operational and actionable. This approach enables a retailer to use one forecast, one set of data, and one business process to manage its end-to-end decisions across the retail organization


For its part, SAP Merchandize Lifecycle Solutions comes in large part from the acquisition of KhimetricsIn my article at the time I endorsed the acquisition, since Khimetrics also had capabilities for consumer packaged goods (CPG) manufacturers.

This link between retailers and their suppliers could assist SAP’s other Supply Chain Management (SCM) solutions. With the recent and ongoing analytic enhancements from Business Objects for the retail industry, one should always count SAP as a serious retail pricing optimization contestant (although the science behind retail pricing optimization might still be beyond the grasp of Business Objects).

The competition can still come from niche retail software vendors targeting smaller retailers, such as KSS Retail and from statistical tool vendors such as SAS Solutions for Retail. On the consulting and intellectual property (IP) front, competitors can be marketing information providers for the CPG industry such as ACNielsen and Information Resources, Inc. (IRI), as well as from business consulting firms such as McKinsey & Company, Inc.Deloitte Consulting LLP, and Accenture.

To SaaS or Not?

The aforementioned mainstream vendors still offer applications that require implementation of highly customized and static software code at each customer’s site. As mentioned before, Oracle’s Markdown Optimization is offered hosted or on premise. Although not yet in a true multi-tenant mode, Oracle believes that it can offer the same benefits as its on-demand competitors. At least, Oracle’s data center is state of the art, and you can learn about Oracle’s Austin data center here.

These single-tenant providers market multiple applications to the same customer, touting a more uniform and interoperable IT environment. Conversely, DemandTec and Revionics provide their software through a software as a service (SaaS) delivery model that is designed to allow quick access to more dynamic software with significantly less costly and time-consuming on-site implementation. The multi-tenant SaaS model also reduces dependence on a customer’s internal IT resources and decreases the costs associated with needed interoperability to connect with legacy systems.

The SaaS model leverages a set of pervasive technology trends that includes the availability of greater amounts of computing power at commercially affordable and decreasing prices, sharp reductions in the cost of data storage, and inexpensive and secure access to broadband communication networks. Due to the dynamic nature of consumer demand and the changing merchandising and marketing objectives of retailers and CPG companies, a pricing solution can be delivered more effectively through a SaaS model. By delivering their software as a service, DemandTec and Revionics are able to:

  • Capture and analyze the most current point of sale (POS) data, transaction log data, and loyalty program data from retailers, as well as up-to-date market-level data, syndicated data, and other third-party demographic content, in order to better understand the dynamic nature of consumer behavior;

  • Intimately understand how customers use software to make their day-to-day merchandising and marketing decisions so the vendors can continuously enhance their offerings to address customers’ business needs;

  • Deliver technical enhancements to their software on a frequent and predictable schedule and with little or no disruption to customers’ operations. For instance, under its SaaS model, DemandTec releases a new software version approximately every six weeks, each one containing significant new functionality. Releases are deployed simultaneously to all customers;

  • Use grid computing and service-oriented-architecture (SOA) techniques to maximize scalability and processing capacity. Since SaaS vendors manage their software for their customers, they are often able to detect and resolve delivery problems or processing capacity needs well in advance of when a customer might actually notice the problem;

  • Enable interoperability across its customers’ diverse legacy systems 


By delivering their software as a service, these two vendors can more quickly enable their customers to make better pricing, promotion, trade funds management, and other day-to-day merchandising and marketing decisions. With the SaaS model, DemandTec and Revionics customers are reportedly able to begin to achieve measurable financial results within a matter of months (if not even weeks).

Yet, SaaS Operations Are Complex (Behind the Scene)

Delivering software as a service to customers includes the following complex operations: quality assurance (QA), release deployment, database management system and application tuning, systems monitoring and proactive problem detection and prevention, application availability, and customer support. Prior to deployment, each new software release undergoes multi-stage testing and substantial QA, including build acceptance tests, regression test cases, customer integration tests, and final system verification tests.

SaaS software is typically hosted in two data centers, and each of these facilities must include advanced physical security, power redundancy, and disaster mediation safeguards and procedures such as biometric access control, onsite power generation, and earthquake hardening. In addition, these vendors have implemented a comprehensive information security management program. As part of this program, security processes and procedures include:

  • Logical access controls such as certificate authentication, role-based authorization, and detailed system logging

  • Vulnerability management assessment and remediation

  • Network security measures including encryptionfirewalls, and monitoring

  • Strict data and software backup procedures with regular rotations to a secure, offsite storage location

  • Network and system redundancy to provide application resiliency

  • Permissions-based security access per data field; e.g., a user can be authorized to access data based on company, banner, zone, store, department, category, sub-category, etc.


In 2008, an independent accounting and auditing firm completed an audit of DemandTec’s controls over information technology and processes in accordance with Statement on Auditing Standards No. 70, or SAS 70. This firm issued a SAS 70 Type II report confirming that suitably designed controls were in place and operating effectively.

Superior customer support is critical to customer satisfaction and to retaining and expanding the customer base. To that end, DemandTec leverages the relationship with Sonata Services Limited in Shanghai, China to provide customer technical support 24 hours a day, seven days a week through its support Web portal and by telephone.

Therefore, while the SaaS model can benefit customers in terms of lower initial costs and more predictable costs (in a pay as you go manner), faster implementations, frequent and painless software upgrades, faster return on investment (ROI), and minimal internal IT staff requirements, these capabilities come at a significant cost to the vendor. David Dorf, Director of Technology Strategy at Oracle Retail, has an interesting take in his recent article in Retail Info System (RIS) News
The best advice I can give is to consider moving non-mission critical and non-strategic applications like expense reporting, invoice matching and development/test to the public cloud. Then focus your internal IT resources on those processes that give your company a strategic advantage like pricing, supply chain optimization, and analytics. If you have sufficient economies of scale, consider building a private cloud to provide the advantages of public cloud computing (e.g., agility, quality of service, efficiency) while mitigating some of the issues with public clouds (e.g., security, compliance, integration, long-term costs).

Pricing Benefits as a Summary

The potential benefits of investing in lifecycle price optimization solutions that can set initial, promotional, and markdown plans (which include many factors such as consumer demographics, cross-product relationships and so on and so forth) are numerous. Some self-evident benefits that come to mind include the following:

  • Optimized pricing to drive sales, volume, and profit while maintaining the retailer’s price image (e.g., better pricing rules that drive consistent policies and eliminate pricing conflicts)

  • Improved efficiency by automating cumbersome, time-consuming pricing tasks

  • New insights into how consumers shop and how they respond to everyday pricing and improved financial predictability, accuracy and responsiveness

  • Enhanced merchandising collaboration

  • Improved store clustering that better aligns sales points with customers

  • Demand-modeled decisions that provide input into downstream processes such as replenishment and labor scheduling

  • Expanded market baskets through improved understanding of product affinities and halo effects

  • Decreased lag time between promotional event creation and execution, which improves promotional effectiveness through the ability to create store-specific advertising messaging

  • Improved forecast accuracy via a single version of consumer demand, which in turns reduces excess inventory while improving customer service levels


Any Concrete Results and Metrics?

In summary, by doing optimized item pricing, a retailer can gain visibility into the impact of a pricing decision on the supply chain and drive more profitable decisions related to store clustering, pricing rules, promotional opportunities, and cycle times. The following are JDA’s examples of results that early adopters of its retail price optimization solutions have reported:

  • Increased revenues by 1 to 5 percent

  • Improved gross margin by 5 to 15 percent

  • Improved forecast accuracy by 15 to 30 percent

  • Reduced inventory by as much as 12 to 33 percent

  • Decreased transportation costs by as much as 15 to 30 percent, and

  • Realized productivity improvements of 30 to 40 percent


Along similar lines, Revionics’ customers talk about sales increases of up to 5 to 10 percent, net profit margin increases of 1 to 3 percent (100-300 basis points), and productivity increases of 20 to 30 percent. Revionics points out that a 1 percent improvement in forecast accuracy frees $14 million of excess inventory for a $1 billion retailer, while the optimal service level equals minimum total cost, generally speaking. Last but not least, DemandTec’s assortment optimization example features a $10 billion retailer where a 3 percent gross margin improvement led to $90 million in bottom-line results.

The figure below shows Oracle’s value statements based on the vendor’s results measurement for Oracle Markdown Optimization:

mdo-results-management.png 

[click image to enlarge]

solution-benefits-markdown-optimization.png 

[click image to enlarge]

Therefore, dear readers, what are your views, comments, opinions, etc. about Revionics’ moves and about the pricing optimization software market in general? We would also be interested in your experiences with this nascent software category (if you are an existing user) or with your current (possibly ineffective) practices, and your general interest in  evaluating these solutions as prospective customers.
 
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