Retailers often face difficulties in optimizing their pricing for different seasons. In the peak season, they need to determine the opening price and the marketing offers. While in the off-season they need to cut down their prices to ensure that stocks are cleared before the trend is gone - this is known as markdown. In the event when there is an immediate need to reduce prices, retail businesses face 3 common questions:
All these concerns are genuine as they can impact your profitability and brand image. To solve this issue businesses practice markdown optimization to cut their prices to an optimum level. Markdown optimization is the process in which various variables influencing demand like consumer behavior, pricing, market trends, purchase history etc. are analyzed to come to a price that can stimulate demand and at the same time ensure maximum possible profitability.
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Today retailers deal with a wide variety of products and the pricing of all these products can vary across multiple channels like mobile, website and physical store. Big e-commerce giants like Amazon have up to 488 million products (source) and they need to optimize pricing for each of them. Though you may not have these many number of items in your business you will still need to optimize pricing for many products based on seasons and trends. Big data analysis tools can analyze market trends using social media sentiment analysis and your customer’s psychology using inputs from sources like POS systems, online transactions and mobile transactions to come up with pricing that will most likely trigger an increase in demand and help you earn more revenues. Data analysts can give weighted importance to all the factors like costs, trends, behavioral analytics etc. to predict consumer behavior due to changes in price.
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We at NewGenApps, follow a proven process to help you gain an analytical approach to pricing. The process of markdown optimization is carried in three major steps:
1. Retrospective Analysis: In this process, the consumer’s purchase history, as well as retailer's historical cost sheets, are analyzed. Sales and profit margins are classified based on buying groups and product areas.
2. Statistical Analysis: Price elasticity for various items is calculated using raw price data. Variance analysis is used to understand differences between performance and estimates.
3. Optimization: In this step, we put the analysis together to reach to price points that ensure maximum profitability along with stock clearance.
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By using big data analysis to perform markdown optimization businesses can benefit in a number of ways. Here are a few ways in which markdown can help your business:
Markdown optimization can help you provide optimal discounts to your customers by analyzing how they respond to an offer. You will know exactly when to start giving discounts and when to increase the percentage (if necessary).
Reducing the price in itself is not sufficient. You also need to know when to reduce the price and when to communicate the change. Markdown optimization ensures that you are able to perfectly time each of your price reductions.
Retailers need to manage their pricing across multiple channels. Whether you want consistency or you prefer to keep a distinction, data analysis can help you determine optimal pricing for all your business channels.
Markdown optimization can help you increase your revenues by helping you reach optimal price points. This process ensures that you keep maximum possible profit margin as well clear your stocks of any out-dated items.
Outdated stocks not only result in the blocked capital but also blocked space. The space that could have been allocated to more profitable items. By using markdown optimization you can keep a check on your inventories and avoid stockpiling.
Thus, we have seen that markdown optimization can help you reach at optimal price points and in turn increase your revenues substantially. It enables data backed decision making as well as analyzing consumer psychology for forecasting demands and trends. If you are looking for business analysts who can help you take advantage of this technique you are at the right place. At NewGenApps we specialize in business analysis and can help you achieve new heights with modern techniques like market basket analysis, markdown optimization etc. Feel free to contact us for any assistance or advice.