I’ve noticed that whoever walks in to a supermarket at the same time as me is who will walk out at the same time too. We are driven around stores like machines, guided to what we want and where they want us to buy it, then kicked out as quickly and profitably as possible. I’m fascinated by how these stores work and so this article held me up this morning.
Once Dangler has set up his basic pricing rules, he’s ready to start testing out potential discounts and special offers to try and improve sales. He goes for an aggressive price cut on the own-brand natural yogurt, cutting the profit margin to a few pennies, and the volume of predicted sales balloons as a result. It turns out that people are really price-sensitive when buying cold desserts. Alas, a large proportion of the gains is offset by a drop in branded sales, meaning the idea would probably result in worsening relationships with suppliers in exchange for a modest increase in profits. We keep searching for the optimal solution, with every small change having an immediate trickle-down effect on related products. It’s like a chaos theory testing suite, with each price being a flap of a butterfly’s wings. The only thing missing is a button to make the system automatically optimize everything, you still need humans to input scenarios.
Along the way, I discover phenomena like asymmetric cross-price elasticity — an eight-pack’s price affects sales of four-packs more strongly than vice versa — and the fact that a “buy one, get one free” offer is more cost efficient than a straight 50 percent price cut (that’s because some people will still take just one).
Read the whole piece to find out who this Dangler is and how while this is an article about American supermarkets, it is featuring software owned by Tesco here in the UK.
http://www.theverge.com/2014/5/2/5667606/supermarket-price-optimization