Price Optimization seems to be the new buzz word in retail. Price Optimization software helps companies determine the optimal price for a product based on many factors such as gross margin %, competition, private label to national brand gap, demand (price elasticity) and brand linking. Additionally, the software utilizes historical data and predictive algorithms to produce price recommendations. What price should I sell this item for to create the highest gross profit for my company? Price Optimization programs are driven by proprietary forecasting engines. These engines are based on sophisticated mathematical algorithms originally developed for scientific research and military planning. Airlines began using these solutions in the 1980s to instantly price fares based on variables like booking lead time, flight date and connections, time of day, service class and customer preference. The programs required enormous processing power only available in super computers and primarily used by large companies like airlines that could justify the investment.
With the advances of hardware and the arrival of faster and cheaper servers, companies have been developing software engines to run on these servers while creating an affordable solution for smaller businesses. The results can be churned out in a reasonable amount of time, allowing a merchant to make more informed decisions on their day to day price strategies.
As the programs make their way into the independent grocery industry, grocers are finding that they can increase their bottom line by 1-2% through the use of these tools. By looking at the detailed information the software provides, they’re able to see potential problems with price strategies that had once been hidden in rolled-up data.
Where is the future of this technology? Only time will tell, however with the competitive nature of the landscape, this could be the next tool that will help the independent level the playing field with the competition.
