Powering retailers’ digitization through analytics and automation

Abstract

Retailers face significant pressure to improve revenue, margins and market share by applying price optimisation models. These are mathematical models that calculate how demand varies at different price levels, then combine that data with information on costs and inventory levels to recommend prices that will improve revenue and profits. These models have been around for a while-so what is different now? We have identified three important changes: (1) Data: availability of internal and external real-time data such as traffic to a website, consumers making buy/no buy decisions and competitor pricing strategies; (2) Analytics: advances in machine learning and ease of access (R, Python) have enabled the development of systems that learn on the fly about consumer behaviour and preferences and generate effective estimates of demand-price relationships; and (3) Automation: increase in computing speed enables real-time optimisation of prices of hundreds of competing products sold by the same retailer. We take advantage of these new opportunities by showing how they were applied at Boston-based flash sales retailer Rue La La, online market maker Groupon, and the largest online retailer in Latin America, B2W Digital (B2W). While all these examples are of on-line businesses which have readily available data and can change prices dynamically, we have also implemented similar methods for brick-and-mortar retailed in applications such as promotional pricing, new product introduction, and assortment optimisation with similar business impacts. Thus, beyond applications to price optimisations, these new trends enable companies to revolutionise their business from procurement to supply chain all the way to revenue management. Keywords: analytics, machine learning, price theory, online retail, forecasting