5% Margin Gain with Optimized Local Promos

A San Francisco-based Fortune 500 Specialty Apparel Retailer had Price Optimization from the leading enterprise software vendor. However, as many retailers have come to learn, end of season markdowns don't solve the in season need to run promotions to meet Plan objectives.

Even with a willingness to pay handsomely for the enhancement to their Pricing system, the vendor was unable to adapt their rigid application to meet the needs of localized promotions. The comprehensive need was to simultaneously adjust the model stock by store to take into account the differentiated pricing.

In just 3 months and for a fraction of the cost, this retailer was in production with the Forecast Horizon Price Optimization solution. Forecast Horizon is able to meet their pricing needs across the entire lifecycle from Initial Price, through In Season Promos and End of Season Markdowns. Forecast Horizon has the unique ability to optimize localized promotions aligned with intelligent inventory allocation. Additionally, Forecast Horizon integrated the optimization results with key business reports to drive adoption 3 times industry average to truly maximize realization of the value.

Intuition Can be Misleading

Allocation systems are well suited to distribute based on historical demand and to meet rules such as presentation minimums and size/pack requirements. However, differentiated pricing from a localized promotion shapes the demand by location. When demand shifts, such as increased sales from the promo in underperforming stores, these Allocation systems naively send more inventory to the less profitable stores. Locations with faster turn and less price elasticity should receive more inventory for more profitable sales.

In this illustration, there were two store clusters: Suburban (SU) and Urban (U).

• The class of products is more popular in Urban stores than in Suburban stores.
• Current Pricing and Promotions were at the chain level: U and SU are at the same Price

Suburban stores were not selling well and had weak price elasticity. Discounts would yield a small lift.
However, the Allocation system saw the increase in demand, but was unaware of the price change. Allocation ships more inventory to underperforming Suburban stores while penalizing more productive Urban stores and minimizing markdown recovery.

Driving Sales and Profit with Local Promos

Forecast Horizon jointly optimized local promotional prices and the allocation of warehouse inventory. Shaping demand by holding price in the Suburban stores with weak elasticity resulted in a negligible sales loss as customers were less responsive to price. Decreasing price in Urban stores with strong elasticity resulted in a large sales lift that made up for the volume lost in Suburban stores.

Having visibility to the future change in demand by store enables proactive allocation to align inventory to meet that demand. By inputing Forecast Horizon's forecast into the existing Allocation system, the stores have optimal inventory levels aligned with the promotions. The Allocation system was able to ship more inventory to the productive Urban stores and starve the Suburban stores (subject to business rules).

The retailer realized an overal margin increase of 5% starting in just 90 days.