In my last blog spot on coupons and bundles, we touched on industry-specific differences that can be crucial to a retailer’s success in the context of Dynamic Pricing. I would like to go into this more detailed and show you which industry-specific challenges and opportunities Dynamic Price Optimization brings with it and how you can use AI software perfectly adapted to this.
This blog post will therefore deal with the specific challenges and chances in the fashion industry. It is special in many ways; I have experienced this in several customer projects. Basically, this industry offers great potential for Dynamic Price Optimization because clothing is always needed and because the average margins are comparatively high. These reasons alone mean, that applying AI methods for price optimization offers a great deal of leeway and creates a large lever for profit potential. Nevertheless, a few technical and strategic requirements should be considered in order to generate the maximum benefit from a dynamic pricing software solution.
- The life cycles of many items in a fashion assortment are comparatively short – often only about 4 to 6 months. During this short period of time, an item must be launched successfully, it must generate as much profit as possible in its peak season and it must be sold out on time (and yet margin-saving) to free up stock for the next season. Take swimsuits for example, as a product that’s often introduced early in spring for a summer target, before warmer clothing replaces its inventory in the fall. The more excess inventory on the shelf and in the backroom come September, the less profitable a retailer is. Therefore, it is particularly important to adjust prices regularly and strategically.
How does a dynamic pricing software support these requirements?
- The software offers various algorithmic procedures for pricing all product life cycle phases.
- The software allows to control the optimization target (revenue, sales, profit etc.) for each product life phase and for each product group in a differentiated way.
- The software can provide relevant, demand-based prices at least daily.
- Fashion assortments are usually both broad and deep. This means that they contain many different items and many variations of these products. Think about the number of dresses, skirts, pants and shoes you see in one shop or store – as well as the number of sizes and colors. This results in both technical and strategic requirements if the product range is to be dynamically priced.
Which functionalities does a software for dynamic price optimization has to offer accordingly?
- The software must have a master-variant capability. In concrete terms, this means that master and variants can be treated both as a relational unit (keyword: family pricing) and separately from each other – both in the algorithmic calculation of demand and in the final pricing. This should be done because women’s running shoes in size 10 are likely to have different demand than size 7 and – if this is part of the strategy – should perhaps be able to be priced in a correspondingly graded manner. The pricing software must therefore be able to calculate and provide differentiated master and variant prices.
- The software must also have a powerful tracking functionality in order to be able to record and process demand in detail at variant level. This forms the basis for sales forecasting and thus for optimal price control.
- The software must be able to process large and complex data volumes with high performance. Fashion assortments consist on average of 20,000 to 50,000 items, and when variants are included this number climbs up to several million. A Dynamic Pricing solution must scale linearly so that it is possible to record the demand for each individual item at variant level (tracking functionality), derive price elasticities and sales forecasts and provide optimized prices.
- Promotions and marketing campaigns are an integral part of every fashion season, as well as part of customer’s expectations. In order to be successful with promotions and above all not to give away too much earning potential, two things are crucial: You have to promote the right items to increase customer frequency and you need to set the right prices for all non-promotional items. With this combination, promotions achieve great success because the promotion itself drives customer frequency and the Dynamic Pricing software keeps the margin of all other products at a stable high level. In this way you increase frequency, sales and profit at the same time.
How can an AI-based pricing software support your marketing campaigns?
- The software should be able to suggest products for marketing campaigns that are relevant and timely for customers, for example based on current demand.
- The software should be able to be controlled quickly and easily so that promotion products can be excluded from the algorithmic price calculation with just a few clicks.
- The software must be able to differentiate between promotions and “normal” purchasing behavior so that promotions do not lead to a reduction in the general price level.
In principle, a software solution for dynamic price optimization should fit into your existing processes as seamlessly as possible. It should also use and supplement the wealth of experience and knowledge of your pricing managers, for example with highly complex data analysis and statistically valid decision supports. The software must be able to support your existing pricing processes and optimize them in such a way that your business units achieve sustainable growth. You can find out how to approach such a project here !