SAP has long since supplied the retail sector with a range of solutions to better manage their affairs and this new solution is intended to help them derive more profit through judicious pricing. According to AMR Research the category of retail revenue management technologies, an umbrella term which encompasses price optimization, markdown and merchandise optimization, is set to be a market that will expand from $75 million this year to $500 – 700 million by 2007.
Retail revenue management involves all the possible in-season strategies for profitably balancing consumer demand with inventory supply. SAP’s new price optimization partner, DemandTec also helps retailers and consumer products manufacturers plan, execute and measure highly optimized merchandising strategies. The company’s technology allows retailers to set the best prices for electronics, perishables and just about every retail item by integrating a company’s business rules and objectives, such as price limits or volume goals.
These applications help retailers convey a certain price image. They identify which items are price sensitive and which items are price blind. Customers are more aware of the prices for items they frequently shop or are advertised, such as milk. Price changes to these items especially impact consumer perception and behaviour but customers can only keep track of a relatively few prices so price blind items, such as gourmet olive oil, represents the majority of a store’s assortment and opportunities for greater profit without losing volume or tarnishing the price image. It is about understanding your customers and their willingness to pay.
Keeping margins from sinking
Retailers, in addition to fighting sluggish sales growth in recent years, have also felt the pinch of faster-changing product cycles. As a result, they have had to develop strategies for moving items that are slow to sell with the goal of clearing out these products quickly enough so they don’t waste space on the shelves, yet not so quickly that retailers risk selling clearance items at a loss. Drivers that are specific to price optimization include the desire for lower pricing pressure on grocery goods because of competitors like Wal-Mart, a desire to better manage the customer experience and to cope with fragmenting demand. Analysts believe that merchandise optimization software is the life raft that will help retailers keep margins from sinking and that using this type of software successfully will enable most retailers to experience a 5 per cent to 10 per cent lift in gross margins.
SAP’s Jason Boyer, Retail Product Manager, Industry Business Unit Retail, California, explained the company’s move into the price optimization area. “In 2001, SAP recognized the importance of the nascent field of price optimization. We considered whether to build, buy, or acquire and decided to partner based on cost, time to market, and leveraging the available expertise. SAP believes that providing a revenue optimization interface enables an end-to-end price planning/optimization, execution, and analysis process, especially within the framework of category management,” he said.
The decision to partner with DemandTec was taken for a number of reasons, Boyer disclosed. Not only is DemandTec the leading revenue optimization vendor in the world with powerful, sophisticated demand models, he said, but its product also offers a user-friendly interface, the company is led by a very strong management, sales, and development team, and it has a solid and growing customer base. The two companies also share same focus markets of grocery, drug and convenience retailers. In addition the partnership also provides SAP with the opportunity to work with DemandTec in retail and consumer products industries and can offer a large suite of demand-based products. Demand-based pricing is DemandTec’s preferred name for Retail Revenue Management, because all price optimisation systems work on a demand-based model. To arrive at a retail price, demand-based pricing relies on statistical models to measure what customers are willing to pay for a product.
SAP originally began developing its interface to link with price optimization systems with a UK company, KSS, which has since withdrawn from the US market. Since DemandTec is a leader in price optimization solutions, SAP subsequently elevated its relationship with DemandTec to preferred partner status and have designed their own system to be open to receive the requisite data, explained Boyer.
Integrated end-to-end pricing
SAP is set to release a standard, open price optimization interface that links SAP for Retail to external revenue optimization systems. Located within the Price Management and Execution module, this interface will enable users to carry out a tightly integrated end-to-end pricing process from planning and optimization to execution and then analysis.
Through the interface the user can send requisite data to a price optimization system, including item and store master data, historic sales data, costs, and price point rules. This data allows the user to execute the price optimization process in the external system. After optimum prices are determined, the external system sends them to the SAP R/3 pricing host system.
There are different ways that demand-based prices can be managed within SAP R/3.
- Prices automatically flow through to the Point of Sales (POS) without any additional user interaction.
- A pricing document is created within SAP R/3 that can be reviewed and activated before prices are sent to the POS.
- Optimum prices can be viewed within SAP R/3 on an individual basis as suggestions next to cost-plus and competitive suggestions and the user can choose whether to adopt and activate the recommendations.
Data export process
The export of data takes place in two steps. On a selection screen the user specifies the data to export. On a subsequent display screen the user controls the selection of items and stores before the export is triggered. Also on the display screen the user excludes certain items and stores from the data export, which are deemed irrelevant for demand-based pricing.
The user may specify items, by entering either a merchandise category or a category of a consumer decision tree, and stores by entering a store grouping. Additionally, the user can specify which data is exported, i.e. master data for items and stores, historical sales data, costs, and price point rules.
The data export can be scheduled as a batch job or kicked off manually, which allows a periodic export of current historical sales data to update the data basis and demand coefficients of the revenue optimization system.
The export is controlled by a Business Add-In, which communicates with an exchange program that is specifically designed for a certain revenue optimization system. This arrangement creates an open architecture that enables integration to a variety of third party systems. Data exports are registered by the usual application log function.
Data import process
Retail prices are imported using an existing retail pricing Business Application Programming Interface (BAPI). This interface has been enhanced to meet the requirements of the combined pricing process. This includes the marking of pricing documents created during the import as well as the creation of pricing documents without the activation of sales price conditions. In this case retail prices can be activated in the usual release process for pricing documents.
Boyer said that many retailers see substantial improvements in gross margin, revenues, sell-through, and reduced inventories. AMR Research analyst, Greg Girard, recognizes the value in this SAP/Demand Tech alliance. “DemandTec is one of the two most promising price optimization vendors and moving beyond just price into promotion optimization for fast moving consumer goods retailers,” he said.
Recently what DemandTec has done is to build up a rules management interface
which is an intuitive user interface for a category manager to create and apply rules that either directly set prices or uses an optimization routine to in turn set prices. “Retailers have not had good tools to do price rules maintenance and I see the trend leaving retailers looking to a single vendor to provide both price rules maintenance as well as optimization,” Girard commented. According to Girard, if the partnership is driven by a customer´s requirements, it is likely to be successful because it will more quickly lead to functionality capabilities. Those partnerships that are driven out of headquarters in the hope that the retailer will see value in it may find it a struggle.
The mainstream is in a holding pattern
SAP’s Boyer added that in terms of the technology adoption lifecycle, many visionaries have adopted, but the mainstream market are in a holding pattern. “This technology must now cross the “chasm.” The key to crossing the chasm is by securing a beachhead in a mainstream market segment and expanding from there,” he said. There are already indications that the market is now moving forwards since several leading companies have signed deals during the last two months, he said.
Although AMR Research predicts that the retail revenue management sector will grow significantly during the next two years, Girard said that the price optimization part of the market compared to markdown optimization is currently suffering from some industry malaise. “Groceries retailers in the US are much more culturally constrained to accept the notion of price optimization in the first place, he said and they are mistakenly afraid that it’s going to ruin what’s called a price image. They mistakenly think it just raises prices and also most of them lack the infrastructure systems to deliver valid data into the price optimization engine, and they lack the systems to distribute them,” said Girard.
According to Boyer, SAP intends to enhance its revenue optimization interface to better integrate other merchandising areas, such as promotions and markdowns but the company does not plan to develop its own markdown optimization tool. Other vendors in the retail revenue management sector include Khimetrics, which also specialices in price optimization and markdown optimization specialists ProfitLogic.