Buyers, beware!

Recently I 've come across a company named Demand-Tec. They've caught my attention probably because in my so called "previous life" I dealt a lot with enterprise management software, and especially with business intelligence. While not as gadgetry - oriented as telecoms, enterprise management was still able to create several areas where I was able to free my imagination and play with some unconventional ideas that were eventually leading to some concrete business benefits for our customers. And what Demand-Tec does is exactly both unconventional and logical and lets them exploit the power of software to give serious business advantage to their customers.

The idea is to use advanced business intelligence and modeling to set retail prices for products. Normally it works like that: a retailer takes the cost, adds his markup and comes up with the price put on a product sticker. Fixed markups do not require much of a [business] intelligence. And there is always a question - should we lower the markup and count on increased volume of sales or should we bring it up trusting the customers won't notice and will buy the product regardless. Airline industry seems to be the most advanced when it comes to price manipulation to maximize their profits. Tickets are most expensive when you try to book your flight six months in advance or six days in advance. The former is for those who plan far ahead (agreeing to pay the premium for feeling safe when they book as early as possible), the latter is for those who have some unexpected events forcing them to fly regardless of the price. Then depending on the route popularity, season, and some other factors, the fare price falls to a low several weeks before the flight, when most people prepare for their journeys and shop for the best deals. Similar variable pricing techniques may be potentially applied to retail stores and this is where the price-optimization software, like Demand-Tec, kicks in. Fed with several years worth of history data, the software predicts how much of something will sell at a given price. Then - simplifying a little bit - all the decision maker has to do is to set the time period when the profits should be maximized, and what comes out is the retail price to be set.

Price setting has a lot to do with consumer psychology. The moods we are in can sharpen or block our sensitivity to loud promotions or hidden price increases. We love to be smart, trying to pick the best value with our independent, well-thought decisions. Unfortunately the truth is, statistically we are very predictable. The model reflecting our behavior is by no means complex, but as the software tracks more of what we do, our "independent" and "smart" decisions may by just manipulated by clever price engineering techniques.

Brian Bergstein brings an interesting story in his recent article on pricing software.

A large retail chain had a problem. It sold three similar power drills: one for about $90, a purportedly better one at $120 and a top-tier one at $130. The higher the price, the more the store profited. But while drill know-it-alls flocked to the $130 model and price-fretters grabbed its $90 cousin, shoppers often ignored the middle one. After analyzing an array of variables, including sales history and competitors' prices, the software suggested cutting the middle drill to $110. That might have made the top drill seem more expensive. But drill aficionados still were fine shelling out $130. Sales of that drill didn't change. However, now that the $90 version seemed less of a bargain, the store sold 4 percent fewer low-end drills - and 11 percent more of the mid-range model. Profits rose.

So the next time you make a decision to buy something at one of these stores, remember, your decision is not really 100% yours... most likely you are being manipulated!