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Tagging the Future of Pricing

The transformative technology that entails tagging merchandise with radio frequency computer chips (RFID) is on the horizon. But ask anyone at the 2005 annual convention of the National Retail Foundation (NRF) and it's clear that most of the industry's players see plenty of smaller fish to fry before undertaking something as massive as the adoption of RFID.

One such technology is markdown optimization software, which helps retailers put things on sale as profitably as possible. Cambridge (Mass.)-based ProfitLogic is the leader in the field, with a cadre of 25 retailing clients that includes Gap (GPS), Toys 'R' Us (TOY), Target (TGT), and Ann Taylor (ANN).

ProfitLogic President Scott Friend expects that more outfits will catch on to the benefits of pricing on-sale merchandise intelligently, which he expects could double his client base in 2005. Over the long term, retailers will use such software to help set everything from initial prices to clearance sales (see BW Online, 8/31/2004, "Software That Delivers Pricing Power"). BusinessWeek Online reporter Amy Tsao sat down with Friend on Jan. 18 at the annual retail powwow in New York, to discuss what the year ahead promises for his 200-employee company, and how the industry is maturing. Edited excerpts of their conversation follow.

Q: What interest are you getting at the convention?

A: A good barometer for us is this seminar we've run for the last three years on merchandising and profit-optimization technologies. We have our customers talk, and other speakers, too. Last year we had a room for 300 -- we were nervous it wouldn't get filled. We ended up with 400. This year we figured we would get 500 people. It turns out we got 700 people. The momentum around these optimization capabilities is really building. It's a fun time to be in this space.

Q: What do you see in 2005?

A: In 2004, we more than doubled in size. We signed a number of new customers. American Eagle (AEOS), Children's Place (PLCE), Sears (S), Marks & Spencer in the U.K. Pace of adoption was pretty dramatic. Markdown tech moved from early adopters to traditional, conservative, more risk-averse clients -- companies that aren't typically first with new capabilities. That's encouraging for us. We're seeing use of analytic capabilities go beyond just markdown to include all the hard math problems in the assortment process. That's a growing, exciting area for us. We will see almost as much activity around assortment execution as there is around pricing.

Q: This time of year is full of clearance sales at retailers. With markdown optimization becoming more prevalent, is it more difficult to figure out which retailers are in trouble?

A: I don't think by virtue of things being promoted that you can get an indication for performance all by itself. Everyone takes markdowns whether they're doing well or not.... If you see late-in-the-season piles and piles of merchandise, it's absolutely an indication there's a problem. You would find across our customer base, while markdown spending is still high, it's happening earlier in the cycle. They're clearing out less-desirable merchandise more effectively and sooner.

Q: How much growth is left for ProfitLogic, if so many retailers are now adopting this technology?

A: Mainstream is good for our growth. It means we're up from the 15 or 20 early adopters to the 200 or 300 mainstream retailers who want to make sure it's proven. I don't think there are 10,000 who want to adopt our technology. But I think there are several hundred in the general merchandising arena that we can help. There are a couple hundred more retailers across Europe and Asia.

Ask me in two years and, hopefully, we'll expand our offerings so retailers can take this idea of better understanding customer demand into other parts of their operations. Any decision up and down the supply chain should be made with some understanding of customer demand.

Q: You have 25 retailers as customers now. Where do you see that number in 2005?

A: I think the number of implementations will be on its way to 50. We're managing over $40 billion of merchandise. Our nearest competitor has $1 billion. We've just started our efforts in Europe. We'll go live with Marks & Spencer soon. And a couple of other clients in Europe, we hope we'll be announcing in the next few months.

Q: There are hundreds of vendors at NRF convention this year. How do you see the software sector that caters to retailers?

A: There is a wide range of technologies. In our arena of things that help improve the buying and allocating process there's a lot of hype. Anything that gets traction -- like markdown optimization -- everyone starts saying they do it. Only way you can sift wheat from chaff is real customer announcements. Are there real customers who are getting benefit from the solutions and is that number growing?

Q: Do you see retailers preferring one-stop shops for their IT needs?

A: I don't. To me technology is a necessary evil -- a way to solve a problem. There are those like IBM (IBM) that help make the plumbing run. Then there are those that sell the solutions to business problems -- that's a larger group of small players who have the narrow focus and deep expertise that is needed to solve a problem effectively. Without the expertise it's hard to do.

We have seen over time some level of consolidation. We bought [competitor] Spotlight Solutions in late 2003. I wouldn't be surprised, in this arena, if the strong get stronger and weak get weaker over the next year. Maybe in 2005 and 2006 a couple of the dominant players will put the pieces together and create an industrywide inventory and price-optimization business.

Q: Would you consider an acquisition or merger for ProfitLogic?

A: A lot of things would have to happen. But a lot of companies out there need what we've got. We do optimization of soft goods like apparel, but we're heading more into hard-line goods, like what chain drug and grocery stores sell. So that's the big question -- do we build software on top of it or partner with someone like [competitor] DemandTec, whose specialty is hard lines.

Q: What about an IPO?

A: If you looked at the growth path of customer adoptions...we are tracking where we should be. Maybe some time in the 2006 time frame, there's certainly that potential.

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