Abstract
This chapter introduces the basic nature of the pricing for the retailer. First, the interplay between strategic pricing decisions and the tactical domain where most data-driven solutions operate is discussed. Next, the major pricing challenges are introduced by discussing the goals that are pursued by a retailer under specific conditions. Later chapters go into more depth as to how these goals can be achieved in practice.
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Notes
- 1.
The price of a product is not allowed to increase over time.
- 2.
In economic literature, this concept of value will often be dubbed the reservation price of the consumer, which represents the highest price they are willing to pay for a product.
- 3.
This is basic algebra; if you only have a single point, there is no way to estimate the slope of a demand curve.
- 4.
For example, when advertising that there are discounts of up to 50%, there is often a legal obligation to have a minimal amount of products and inventory to support this claim.
- 5.
Fortunately, public opinion is driving change in this context, and France has even passed law prohibiting this wasteful practice [6]. All this enters into overarching trends where consumers attach value to environmental awareness in the brands they purchase.
- 6.
For example, handling, shipping, and possible return costs.
- 7.
Ideally, the implications of these strategic rules are quantified, and the strategic pricing rules are challenged.
- 8.
This can be a point of contention. Leftover inventory is at times viewed as a cost because it represents what has been purchased in excess. This is only true when evaluating the initial purchasing decision, not subsequent changes that have been made to the price of a product.
- 9.
The concept of product life cycle is seen within the context of a retailer. The start of the product life cycle is the point at which a product is added to the assortment; the end of the product life cycle is the moment when the product is removed from the assortment.
- 10.
Contrary to economic conventions, the price is shown on the horizontal and not the vertical axis.
- 11.
This assumes that all products take up similar space in stores and warehouses.
- 12.
At the time of writing, this is exacerbated by geopolitical events that are negatively impacting global supply chains—specifically the aftermath of the COVID pandemic and the Russian invasion of Ukraine, further reducing the flexibility of demand. Beyond their short-term impact, these shocks have revealed that global supply chains can easily be disrupted—with far-reaching effects to the supply of goods in consumer markets around the world.
- 13.
This assumes that demand is price elastic; if demand is not elastic, the best option is not to change the price as this would only decrease total revenue.
- 14.
This is often not the case, as discussed in detail in Chap. 4.
- 15.
Also take note that in real scenarios, it might be required to use a different definition of a stockout than zero inventory. The reality might be that specific sizes of an item are hard to sell and that sales will fall to zero when there is still a fraction of inventory left. Where this level lies exactly is dependent on the nature of the retailer and should be determined based on past inventory values.
- 16.
Both these objectives effectively have the same real-world meaning.
- 17.
Returning to the domain of mathematics and optimization, it can be stated that the point at which a maximum is obtained will not change if a constant is added to the equation. The maximum value of y = −x 2 and y = −x 2 + 100 will both occur for x = 0. The additional constant does not change this.
- 18.
An exception may be re-negotiating prices with suppliers for products who have performed badly—something which at times is accepted. Along the same vein, it may be possible to return a fraction of unsold inventory to suppliers. But this is by no means a common practice.
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Kerkhove, LP. (2022). The Retailer’s Pricing Challenge. In: Data-driven Retailing. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-031-12962-9_1
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