Apparel retailer uses Competera’s pricing software for markdown optimization and margin boost

Photo: Uniqlo

Apparel retailers are highly pressured to clear off stock quickly before the next season starts. The pressure is much higher than in other industries as the collection cycles are very short. Therefore, very often for the sake of speed retailers choose “blanket” discounts, or standard markdown, for all the items in the collection.

Why you need to optimize markdown

Indeed, this works. Retailers do boost their sales and liquidate excessive inventory by a deadline. But, unfortunately, they kill their profit margin. This happens as they fail to take into account the elasticity of price of every item they offer. As a result, they miss out on the opportunity to define which products can be safely priced higher and increase their revenue, while still getting rid of old stock.

Let’s imagine we are selling two groups of products. We apply “blanket” discounts in the first group. For the items in the second group we calculate optimal prices based on their price elasticity. In other words, we use differentiated discount for every product. From Competera’s experience, the sales in the first group can grow three times faster than in the second group. However, the gross profit remains the same for both groups.

Advanced retailers choose next-gen pricing tools

Calculating optimal markdown prices is an extremely hard job if you do it manually. The sheer number of data points and parameters you need to analyze in real-time is enormous and, frankly speaking, unyielding for pricing managers. That’s why advanced retailers are testing the effectiveness of sophisticated pricing software. Such pricing tools mostly use machine learning algorithms to take into account price elasticity and recommend optimal discount prices for every item in order to maximize revenue for the whole product portfolio.

Eastern European apparel retailer Intertop is one of the advanced retailers looking for modern price management software to solve the above problem. The company partnered with Competera to reach several goals within a six-week market test:

-        clear off shelves by a certain date;

-        maintain gross profit and profit margin;

-        speed up repricing.

A six-week market test involved two groups of four footwear brands, Clarks, Tommy Hilfiger, Geox and Timberland. In the test group, Intertop’s managers applied elasticity-based markdown price recommendations. In the control group, the repricing process remained the same.

Intertop saw the following results:

-        profit margin saving: 200 basis points. Both groups offered the same average discount price, which means that the brand and price positioning was intact;

-        For one of the brands, Clarks, the test group outdid the control group by three parameters:

-        For the other brand, Tommy Hilfiger, the test group also outperformed the control group by three parameters:

As for repricing, it took only 15 minutes, which translates into 4 hours saved per pricing manager per repricing cycle.

Naturally, the new solution was not fully accepted right from the start. It took Intertop’s pricing managers some time to get adjusted to it. Ilona Baskova, brand manager responsible for pricing at Intertop, commented: “We would be skeptical at first. I wouldn’t call it distrust, but still… So, I calculated new prices for the first repricing cycle myself and then compared them with Competera’s suggestions.”

She added: “I remember that for the most part, we had identical ideas. It seemed weird to me: how could it know what I wanted to do? After that, we just trusted the machine (and course-corrected, if necessary). And it worked!”

Based on the results of the market test, the retailer is planning to use Competera’s solution to optimize pricing for its upcoming collection.