Even if you spent a single day in an Economics class, you’re probably familiar with a concept of supply and demand, where the price for a product has an impact on the demand and subsequent sales of it.
Associated Press runs an article on retailers employing mathematical models for price optimization, where some products are priced higher to generate higher margins, and some are discounted to generate larger volumes even at the expense of per-product margins. DemandTec, Oracle and SAP are some of the companies producing those mathematical models for retailers around the country, with AP listing some of the pricing optimizations employed currently.
Most of the time, according to the article, the calculations are not made in vacuum, but in comparison with existing sales and current product selection. So three power drills selling for $90, $120 and $130, all generate certain among of profit for the retailer. The higher the price, the higher the profit, as markup is universal among all the models. High-end consumers go for the $130, while bargain hunters think there’s nothing wrong with $90 drill. Result? $120 drill doesn’t sell that well. Pricing optimization places the second drill at $110, where it’s suddenly affordable for those who used to buy $90 drills. After all, it’s only additional $20.
There’s an older article in CFO Magazine justifying the cost of price optimization systems for CFOs.
