Sales may go out like last year's winter coat

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For decades, December 5th served as markdown day for winter coats. The advertising of the sale drove store traffic and cleared excess inventory. That's the way it was always done. The specialty retailer liked it this way.

But what would happen if the retailer, heaven forbid, delayed the markdown until January 5th? A nice lift in margins of $250,000, that's what.

Welcome to the future of the retail sale, or the end of the sale, if the predictions of some industry analysts come to fruition.

As increasingly sophisticated technology allows retailers to massage and manipulate sales and promotion data, ending the vicious margin-busting cycle of the sale has become the holy grail in a landscape so crowded that retailers are forced to focus on store-by-store profitability rather than growth via new store openings.


"We are seeing a dramatic shift in the kind of tools available," said Mark Bergen, professor of marketing at the University of Minnesota. "The systems have been growing over time and are about to pay off. Retailers have spent the last decade building the kind of knowledge that traditionally lived with ad agencies and consumer product companies."

Take for example Jo-Ann Stores, which spent years and millions building a database of customers-10 million in all-and then sat on the mounds of data. In January, Kevin Brown, VP-marketing at the specialty arts and crafts retailer with 850 stores, hired a team of six analysts-there are four more positions yet to be filled-who do almost nothing but massage and analyze the data. They adjust the impact of different variables between the price of the items, the advertising dollars spent and sales.

"It's not rocket science anymore, it's mainstream," said Mr. Brown, who joined Jo-Ann after a 15-year career in retail consulting at Accenture. "You've got to be more fact-based in promotions and pricing. You can't just keep sitting on a ton of data."

Just as marketers aim to better customize and tailor advertising messages to individuals instead of the fragmenting mass market, retailers like Jo-Ann want to customize pricing and promotions more accurately. A handful of firms such as ProfitLogic, KhiMetrics and DemandTec have entered the scene in recent years to help retailers do just that.

"Advertising and pricing decisions were too often made in isolation," said Chris Morrison, director-promotion optimization solutions at ProfitLogic. "It's time to bundle those decisions together."

In 2005 alone, Cambridge, Mass.-based ProfitLogic, a marketer of decision analytics software for retailers, has signed on such top-tier retailers as Nordstrom, Bloomingdales and Loehman's, adding to a client roster that already included JCPenney, Gap, Sears, Roebuck & Co., Target, Children's Place and American Eagle. For Bloomingdale's, ProfitLogic helped shift from a chain-wide pricing model to a regional pricing one, according to Jakki K. Glivicky, director-marketing at the software provider.

As retailers shift to a more data-driven pricing strategy, other conventional wisdom is being challenged. In the upscale specialty apparel world, most retailers would time two big promotional periods: one to kick off the season focused more on the product and one at the end of the season promoting markdowns to clear inventory out of the store-the winter coat sale just one example. But "we've found the second promotion late in the season actually has very little impact," Mr. Morrison said.

Weaning consumers off the sales cycle isn't a surefire strategy, admitted Jo-Ann's Mr. Brown. "The hope now is we shouldn't have to keep using price as the only reason [the customer] comes to shop with us," he said. "We shouldn't have to keep [luring] her back with the message: `Here's another coupon,' but she keeps voting for that. Every time we run [a sale] we see an uptick in sales and when we don't, the sales go south."

In the jargon of pricing, the strategy that promises the most improvement to margins is a "highly variable pricing strategy," according to Glenn Voss, associate professor-marketing at North Carolina State University in Raleigh.

It's the antithesis of the Wal-Mart model and the stable price offerings common at low-end discount stores, such as dollar stores and limited assortment concepts like Aldi. Instead, a variable pricing strategy offers "each customer a different price at a different point in time," Mr. Voss said, to capitalize on fluctuations in supply and demand.

Variable pricing is nothing new. Around for decades after first appearing in the airline and hospitality industries, there are clear pitfalls-especially the innate human inclination for fairness. "People are never pleased to discover they did not get the best deal," Mr. Voss said.

thinking ahead

With technology advancing so quickly, retailers must think about the impact of moving to such a customized message, particularly the soon-to-be realized ability to create pricing variations across regions or even within the same city. With the proliferation of retail offerings and channels, price-shopping customers will reward retail brands that "reduce the search costs," Mr. Voss said, adding: "Many shoppers don't want to put so much cognitive effort into the shopping experience."

Moreover, Wal-Mart's everyday low price positioning has spurred a dramatic change to the semantics of the sale across retail categories from department stores to grocery chains. In a recent Macy's circular, instead of promoting a cardigan with a moment-in-time sales price, the product description reads: Always $24.98. Giant Eagle has adopted a "lower price" shelf program: "This isn't a sale. There isn't a catch," touts circulars promoting its program.

As retailers become more sophisticated, there's evidence from the academic world, via work by researchers focused on the consumer psychology of pricing, that ending the sales cycle might just work in a retailer's favor.

"Most managers perceive consumers to be more price-sensitive than they really are," said Gerald Smith, associate professor-marketing at Boston College. "Most managers often make the mistake of interpreting the market as being broadly price-sensitive when, in fact, there are only select segments that are."

A famous case study on gasoline retailers mired in a price war revealed that only 19% of consumers were price sensitive, contrary to the perception that 80% were, Mr. Smith said. "Retailers are beginning to use weapons that kind of deter the price aggression of their competitors," he said, pointing to the popularity of the guaranteed price match and the strategy of retailers like Bed Bath & Beyond to allow customers to use competitor coupons.

"It sends a strong signal: If you are going to discount, we'll undercut you even further," Mr. Smith said. "This takes the price competitive customers out of play because they are comfortable they are getting the best price and don't have to shop around."

Peter Walsh, chief marketing officer and consultant at the Boston-based Strategic Pricing Group, believes retailers have only just begun to tap into what pricing can do for margins.

"Our point of view is that pricing in most firms is fairly undeveloped," Mr. Walsh said. "Wal-Mart, Lowe's and Home Depot all have sophisticated strategies on buying and procuring goods, systems singularly focused on getting the lowest prices from suppliers. Now the focus is on the consumer."

* Marked down

Some retailers are finding that some promotions late in the season have "very little impact." Rather than system-wide sales, some are considering variable pricing strategies to capitalize on fluctuations in supply and demand in various regions. But such a model could run afoul of the human inclination for fairness. "People are never pleased to discover they did not get the best deal"

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