Retailers Can Price More Sharply

Mass Market Retailers
April 19, 2004

San Francisco – Wal-Mart Stores Inc. has grown to be the world’s largest retailer by striving to offer the lowest price on nearly everything. It is a great strategy, but retailers that cannot match Wal-Mart’s prices have to come up with a different approach.

Enter DemandTec, which makes price-optimization software. The company’s aim is to help retailers price individual products strategically in order to attract consumers without losing money.

A number of DemandTec customers discussed the advantages of the software at a meeting held in conjunction with the recent Food Marketing Institute Marketechnics show here.

Duane Reade’s Director of Merchandise Control Craig Breslin described how his chain used DemandTec’s price-optimization software in its baby care selections. The drug chain had assumed that it was not a destination for baby formula but that consumers stocked up on formula at other outlets and would only buy it at Duane Reade during fill-in trips.

Further research, however, found that people shopping for their babies were the retailer’s most profitable customers. Rather than lowering its prices on all baby items in order to attract more of these customers, Duane Reade used DemandTec’s software and decided to sacrifice its profit margins only on baby formula. As a result, the retailer improved traffic to the baby aisle and made enough on additional sales of more profitable baby products to recoup twice what it spent to reduce prices on formula.

"Duane Reade was able to increase sales without sacrificing margins using DemandTec’s software," said Breslin. "For example, we increased unit sales of baby formula by 14%, and baby diapers sold at an increase in unit sales of 10% without cutting margins."

H.E.B. Grocery Co. has also used DemandTec’s software, according to Mark Beaty, merchandise process owner for the chain. The software has allowed the regional supermarkets chain to determine price elasticity, and the potential for cannibalization and sales lifts.

"As merchants, what we really want to do is make enterprise decisions around revenue management," Beaty said. "More importantly, we want to understand the cost and projected returns associated with those decisions. We believe DemandTec applications go a long way to helping us achieve those goals."