How Retailers Are Using Price Optimization Solutions To Increase Profits

Retailers (finally) are realizing that the driver of their profit is price optimization. In short, using science to price right and reduce the compulsion to discount. A recent Bloomberg article showed both Ralph Lauren and Michael Kors reporting headway in profits -- by offering fewer markdowns, executing better management of their inventory, and receiving no objections from their shoppers about the pricing. "Significant improvement in gross margin is a great sign the strategy of tightening inventory and pulling back on promotions is helping profitability,” said Bloomberg Intelligence analyst Chen Grazutis.

Also, "many shoppers seem to be less obsessed with getting a low price -- and more focused on the product itself," said John Idol, chief executive officer of Michael Kors Holdings Ltd.  Idol said the company’s two best-selling products in the past quarter were Mercer handbags and smartwatches -- all of which sold at full price. Its Bancroft bags, which are made in Italy and cost about $1,000 on average, are also selling well."

“We really have shown that if it’s the right product you do not have to have these aggressive markdowns happening at retail,” Idol said. (As well, Ralph Lauren and Michael Kors have moved to "making their products more exclusive by closing storefronts and relying less on the troubled department-store industry). The progress shows that a brand like Michael Kors "can once again regain the permission to charge full price,” said Simeon Siegel, an analyst at Instinet LLC.

Earlier this summer, CNBC reported that "Kohl's entered the spring period in a much better inventory position [than] it has for some time..." "There was far less surplus fall and winter stock, which helped the margin rate as less discounting was required to shift old merchandise," according to GlobalData Retail analyst Hakon Helgesen.

For several months, JCPenney has also been focused on its pricing strategy initiatives ... noting significant gross margin opportunities in areas such as pricing analytics... to balance inventory and also minimize markdowns (with a) bigger opportunity with shrink reduction for an inventory perspective on which they've been working.    

Meanwhile, Zara's is used as a long-term example of success. Zara has focused teams of designers and product managers... and produces where it sells... (which) achieves short lead times for new fashion ideas. Today, Zara can replenish existing items in as little as two weeks, enabling the company to produce what the customers want. In short, Zara's tight integration of design, planning, merchandising and production enables the company to be flexible and therefore able to respond quickly to any market need. 

Bottom line for your bottom line:

Price optimization leads to good inventory management, the reduction of markdowns, and the achievement of higher gross margins. In short, the secret remains: Determining the optimal price at which a product should be sold to attain the optimal sales levels and the maximum gross margin levels, as well as developing the most effective supply chain. Retailers would be wise to emulate these moves.

Summary:  

Ralph Lauren and Michael Kors: Price right and discount less!

Kohl's: "Better bottom line performance is ... a function of more careful inventory management and a focus on cost reduction."

Zara: If a retailer can forecast demand accurately, far enough in advance, it can enable mass production under push control and lead to well managed inventories, lower markdowns, higher profitability (gross margins), and value creation for shareholders in the short- and long- term.  (Zara's Secret To Success: Forbes, with reference to The New Science of Retailing (Harvard Business Press by Marshall Fisher and Anent Raman, Wharton School at the University of Pennsylvania and the Harvard Business School).

 

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Naomi K. Shapiro, Strategic Market Communications

About Author

Seasoned strategic market communicator, Naomi headed public information for several academic and professional associations as well as founding Creative Brilliance Associates Market Communications. She created and published Brilliant Ideas for Publishers Magazine and authored popular newspaper trade reference, The Brilliant Book of Promotions, Sales Tools & Special Events. Simultaneously, Naomi savored the world as an adventure travel writer that included trekking on glaciers, fishing with saltwater crocodiles and swimming with piranhas. Naomi holds her M.A. from the University of Wisconsin, including participation in a unique industry-science-technical writing program.
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