Pricing Software Could Reshape Retail

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.

So the store sought advice from a new breed of "price-optimization" software from DemandTec Inc. What followed offers us a clue about important shifts that technology is bringing to retail shopping.

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.

In the early 1990s, while examining equations that predict the behavior of billions of atoms in gases or other complex systems, Ouimet realized that the buying decisions of consumers could be plotted in much the same way.

In other words, we think we have free will when we walk into a store and decide whether to purchase something. But en masse, we have very predictable responses to the prices we encounter. "It's really amazing to look at that," Ouimet says.

Article Link (AP)