Abstract
Discounts are frequently used to encourage demand without permanently changing the list price of a product. This chapter discusses how discounts can be improved using data-driven decision-making. Both permanent price reductions (markdowns) and temporary promotional discounts are discussed. The main focus is the former, as the markdown decision is often influenced less by the marketing objectives and can more easily be delegated to a data-driven algorithm.
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Notes
- 1.
For example, plane or concert tickets.
- 2.
While the discount remains for the complete lifetime of the product, the magnitude of the discount can at times be increased or decreased.
- 3.
This number is based on experiments that have been carried out at eight European fashion retailers by the author.
- 4.
A stock keeping unit, often represented as an unique product or barcode in a system.
- 5.
This is a simplification since the elasticity depends also on the price change.
- 6.
For example, in an in-store outlet.
- 7.
It may be the case that strategic considerations come into play here and that pricing a product too low is undesirable because it can cause the perceived value of the product or brand to be eroded in the future.
- 8.
Depending on local laws, these periods can be officially determined or can be freely chosen by retailers. Regardless of this, there are often clear conventions in different countries as to when the sales season broadly starts and ends. Much of this is also inspired by seasonal demand for different types of products.
- 9.
Assuming there are no transaction costs, for the sake of this simplified example.
- 10.
The first reason being company-level objectives and constraints, as has already been discussed extensively.
- 11.
In other terms: Simply adding a dummy variable that indicates if a transaction is a promo price transaction is not sufficient.
- 12.
The process of selecting and formatting the independent variables of a predictive model.
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Kerkhove, LP. (2022). Optimizing Markdowns and Promotions. In: Data-driven Retailing. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-031-12962-9_4
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DOI: https://doi.org/10.1007/978-3-031-12962-9_4
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