Price Optimization: Uncovering Hidden Trends

MICHAEL GARRY

One of the hottest retail technology applications this year is price optimization. A trio of application vendors are making headway with grocers, even in a recessionary economy, albeit with systems that have become more affordable. In many cases, the software is being sold on a software-as-a-service (SaaS) basis.

“Price optimization is available to mid-tier and small-tier grocers,” said Nikki Baird, analyst and co-founder of Retail Systems Research, Miami. “It's not just for the big guys anymore.”

Among the food retailers that have selected price optimization systems this year: Price Chopper, Schenectady, N.Y. (DemandTec's system); Big Y, Springfield, Mass. (Revionics); and PCC Natural Markets, Seattle (KSS Retail).

“Price optimization is becoming an accepted part of a retailer's standard application portfolio,” said Baird. What is attracting many retailers, she said, is that the systems enable them to drive both sales and margins at the same time. “You can always drive sales by cutting margins, but to increase both at the same time is really difficult.”

Moreover, price optimization does its work at a very “granular” level, down to individual stores and items. “It uncovers trends and important characteristics that you don't see at an aggregate level,” Baird said. “Averages hide a lot.”

As an example, she described one Texas regional chain that divided its stores among those near a Wal-Mart, those near another grocery competitor and those near no grocery competitors. “The optimization recommendations they got back made them realize how much margin they were giving away at stores with no competition,” she said. “They were setting prices at those stores to compete with Wal-Mart.” That one adjustment “paid for the whole implementation,” she added.

PCC Natural Markets has been considering an investment in price optimization for the past two years, and finally made one last month. The retailer, which runs nine stores, selected a system from KSS Retail, Florham Park, N.J., that handles both regular and promotional pricing because it “is more compatible with our core operating platform,” which is the HQ pricing and inventory management system from Retalix, Plano, Texas, said Russ Ruby, PCC's director of merchandising.

Unlike SaaS systems from Revionics and DemandTec, the KSS system is being installed inside PCC headquarters. “It requires us to be more hands-on with our pricing decisions,” said Ruby.

Ruby attributed PCC's decision to invest in price optimization now to its recent growth and need to “do something more refined” with our pricing, rather than handling it manually. “It's part of our long-term operating strategy,” he added.

PCC plans to use the system to drive certain categories. For example, for its new bakery operation, price optimization will help determine how items should be priced vs. competition and other brands in the category. “It gives us the ability to make decisions,” he said.