Inventory Management: Price Optimization to Avoid Overstocking of Inventory
Poor inventory management may lead to serious problems such as poor cash flow, high costs low profit margins and so on. There is no silver bullet that can solve this issue. In our series on this topic, ScaleUp42’s Data Science Partner, Ashwin Khanapur, talks about the use of Price Optimization as one of the many tactics retailers can use to clear their inventory while controlling profit margins.
Ashwin says "
If you are a retailer who is looking to develop a price-based marketing strategy as one of the solutions to get rid of excess inventory, please read.
Overstocking is common problem faced by lot of retailers. To solve this problem, one of the biggest levers that can be pulled before the product expire is the price. As you would imagine, as you keep reducing the price of the products, sales will go up. That doesn’t mean that you keep reducing prices without any science involved.
There are essentially three steps to develop price optimization.
Start by testing different prices for each product. Try four different prices to see what price generates what kind of sales for each product.
Price Response Function: How the price impacts the sales of the products! While developing PRF, pricing analysts should also consider business constraints important for the profitability of the business.
Price Optimization Model or Program
Once we have PRF for each product and you have provided business constraints to us, we can build a price optimization program that will find the best price for each week or each day – depending how dynamic you want to be with the frequency of changing prices. The optimization will help you determine the best prices while considering business constraints. Retailers can provide constraint inputs such as:
Amount of cash flow every day or every week.
Product expiry dates.
Salvage value: Some products may have salvage value – it is an important input to have as we know we are not going to reduce the price beyond the salvage value.
Cost of the product: We do not want to go below the cost because at the end of the day we want to ensure that the profit margins are kept at the best levels possible while trying to get rid of unsold inventory.
How else can you use this information?
Bundling offers: Couple with the analysis of Halo effects a product can create, price-based bundling is a great way to upsell the products that are close to expiry or difficult to move by their own.
Creative ways of discounted views of showing different prices: Whether its flyer marketing or e-commerce store on the website, retailers can position the products that will grab attention of the viewers based on pricing and bundling.
Marketing campaigns: Some customers may not be used to seeing such prices on the products before. Price-based marketing can help to reconnect or retarget the lost customers or increase customer retention.
End goal of price-based marketing strategy is to makes sure that the products sell at the right time, at the price. Price optimization helps to understand how much customers are willing to pay for certain products. This strategy will help retailers to publish best prices on their e-commerce website, flyers, digital marketing campaigns as well as manage in-store displays to sell price optimized products faster.