Retailers turn to software programs to get a leg up on savvy customers

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The year Beverly Lankes found herself forced to shop on Christmas Eve was the year she discovered the rewards of waiting. "I was like, 'Wow, look at all these great deals,' " recalled the Whitehall resident.

It's on again, the annual game of chicken between consumers and retailers over when to get the best deals, and when to offer them. In a show of power, customers -- procrastinating nicely as usual -- have embraced price comparison tools available through shopping online and using personal data assistants.

But retail chains, too, have a new card to play. Many are using computer software to take some of the gut-wrenching emotion out of the decision on when to offer 20 percent off or throw in the towel and mark a product down 70 percent.

Merchants at big public companies drop terms such as "price optimization" and "markdown optimization" for these computer-driven programs. American Eagle Outfitters was an early adopter. Stein Mart has been rolling out its own system. Even Family Dollar Stores has begun testing new pricing programs to try to boost sales -- and profits.

They start by hiring companies staffed with statisticians developing algorithms to calculate how well blue jackets sold last year and what happened when the price dropped 10 percent. Factors such as weather, regional tastes and competition in each market also may get crunched in. In the end, the programs spit out pricing and timing plans that, mathematically speaking, should create the most bang out of shoppers' bucks.

"They're evaluating how sensitive consumers are to price changes on product," explained Michael Barrett, retail research director for Boston-based AMR Research, who estimates no more than 100 chains now use such software.

It can be used to decipher such complex questions as, will a 15 percent markdown work as well as a 20 percent markdown? Should a store just go quickly to 40 percent off? How much will these moves affect profits? Will the supply of fuzzy slippers with candy canes last until Dec. 23 without hanging around unwanted through Dec. 26?

"In many cases, retailers either were taking markdowns too early or too late," said Mr. Barrett. "By doing so, they were giving away margin dollars."

Consumers may not be aware last year's 30 percent markdown has morphed into a 20 percent one this year. After all, retailers have long experimented with different promotions.

But savvy shoppers have their methods, too.

Take Alice Williams, of Wexford, who as she stood last week in a sea of red Sale signs at the Kohl's store on McKnight Road, admitted she doesn't watch the weekly progression of ad circulars.

She just knows that "Kohl's is pretty cheap," making note of a child's winter hat set in her hand that she saw at Talbots earlier in the day at a much higher price.

Rather than look at a sale sign, Ms. Williams said she decides how much she's willing to pay. And figuring out what she, and her peers, may think that hat or this scarf are worth are part of what the new computer programs are meant to address.

The systems aren't perfect. American Eagle President Susan McGalla was asked in a recent earnings conference call about a rapid price hike on a hot item in the fall. She conceded some prices on "fur trend" items turned out to be too low.

"When we can't get any more of something like that and we are way below market, we try to catch it within the first week of sales and make that adjustment," Ms. McGalla told analysts. In other words, it was a hot seller in short supply, so raising the price was a no brainer.

The price software can help with such decisions, sending warnings to management about products selling much faster or slower than expected, said Gladys Lau, retail industry director for software company Oracle. In a small business, a store manager could keep an eye on all the merchandise but that's difficult as retailers grow. It's easy to forget about the Rudolph wrapping paper in the corner and then get stuck with it after the holiday.

"It's not like wine. It doesn't get better with age," quipped Ms. Lau.

The speed at which information gets back to those who can make decisions doesn't mean prices change daily. Mr. Barrett noted the staff and the cash register wouldn't be able to keep up.

And no software would be able to predict that, say, Paris Hilton would wear a sweater from Abercrombie & Fitch during a television appearance and send sales soaring. "That's the creative part of retailing," said Ms. Lau. Human beings can always overrule the computer's suggestions.

Larry Altman had never even heard of price optimization software but the idea turns him off.

The owner of two L.S. Altman men's clothing stores in Mt. Lebanon and on the South Side relies on years of experience to make the call on prices and markdowns, even though he has access to his own computerized spreadsheets.

He chooses his own merchandise and prefers to keep the faith on items he believes will find a customer, even if they start off slow. That said, he admits retailers can become too emotionally involved in their goods and miss the moment when it's time to make concessions.

"Sometimes, the cheapest markdown will be the first one," he said, referring to an adage that customers enjoy sales. The exact right discount -- not too high, not too low -- may stir up enough excitement to get things moving.

Generally, it's not worth keeping goods more than six months, he said. At that point, the store should probably get as much money out of the merchandise as possible and put the funds back to work in fresh product.

Optimization software tends to be most useful for setting prices on fashion items and seasonal merchandise. Apples, for example, don't change dramatically for the back-to-school season or go out of style after the holidays.

No matter what software comes to play, the programs are just another tool. Each retailer has its own price persona that may range from offering a luxury clientele a certain priceless cachet to the everyday low price model that Wal-Mart has used.

Department stores have dabbled in offering certain value items at the same price all the time but their customers are used to waiting for sales and using coupons. "The technology is not a strategy," said Marc Dietz, senior director of retail product marketing at software provider DemandTec Inc.

Consumers learn each store's strategy and decide how they want to respond. Mr. Barrett, a former Kaufmann's employee, remembers the days when the Downtown store had a basement full of items slowly being cleared out. Each week, on schedule, the discount would increase.

"People would actually try and hide merchandise," he remembered. If they could keep someone from buying it until the next week, they'd get the lower discount.

Mrs. Lankes, who was at Ross Park Mall last week shopping with a friend, makes a lot of gifts. She also loves online shopping.

It doesn't hurt that her favorite online retailers pay attention to what she buys and then, perhaps based on results from some software program, send her offers on things she wants.

"Sometimes," she said, "you get a really good deal."


Teresa F. Lindeman can be reached at tlindeman@post-gazette.com or at 412-263-2018.


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