[EAS]Paying the Price

pjk pjk at design.eng.yale.edu
Wed Sep 25 13:15:51 EDT 2002

Subject:   Paying the Price

Hmmm..., "airline"-style dynamic pricing for everything?
Utilities too? Stockmarket-type scrolling displays at the
supermarket? "Milk last sold at $.../gal"?  --PJK

(from INNOVATION, 25 September 2002)

We bet you've never heard of "pricing professionals." They're part
of a new  trend, and here's a whole trade association called the
Professional Pricing  Society, which says that 19% of its member
report directly to senior  management (compared to just 9% two years
ago). The old way of pricing  something was to look at your costs
and then mark them up by some  percentage to determine a price. Not
any more. Now a company's pricing  strategy is focused not on what
the product cost to make but on what the  customer is willing to
pay. The unit that figures those issues out is  typically called a
"tactical pricing group" (or some such name), whose  pricing
professionals consider all the variables likely to influence a 
customer's buying decision. At one division of Emerson Electric, a
tactical  pricing group looked at new piece of equipment which,
based on cost, should  have been priced at $2,650. But based on its
research the group found out  that Germans placed no value on the
Emerson brand name and wouldn't pay  that much (bad news for
Emerson), but that (good news for Emerson)  customers on both sides
of the Atlantic were willing to pay 20% more than  Emerson planned
to charge. Final price: $3,150. "Market value" is, by  definition,
what the market will pay, and professional pricing specialists  are
paid to learn the market, not just to do arithmetic. (Wall Street 
Journal 18 Sep 2002)

Meanwhile, retailers are also checking out a new tool called 
price-optimization software, which is designed to project an ideal
price  for every item, at each individual store, at any given time.
Terry  Burnside, COO of Longs Drug Stores, is an optimal pricing
convert, having  tested a system by DemandTec for the past eight
months. Burnside notes that  the technology generated a
"category-by-category increase in sales and  margins," particularly
in non-pharmacy sales, which make up most of Longs'  profits.
Similar results were noted in a recent study by Gartner and Retail 
Information System News, which found that nearly half of retailers
using  price-optimization software expect it to bring a payback
within 12 months.  The software works by plugging in reams of data
from checkout scanners,  seasonal sales figures, and other
information into probability algorithms  to develop an individual
demand curve for each product in each store.  Retailers use that
information to adjust prices up or down according to  each store's
priorities -- profit, revenue or market share -- to achieve a 
theoretically maximum profit margin for their goals. The most
valuable data  the software delivers is "the crossover point between
driving sales and  giving away margin unnecessarily," says Burnside.
And while some customers  might find it disconcerting to find
different prices on the same products  at different stores owned by
the same retailer, optimal pricing proponents  say they're onto
something big. "We think the market for price-optimization  software
could dwarf the market for supply-chain management," says  DemandTec
CEO Dan Fishback. (Business 2.0 Sep 2002)

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