Buffeted by cutthroat competition, some retailers are starting to ditch gut instinct and turn to Web technology to make pricing decisions. But few can boast the kind of payoff privately held Northern Group Retail has had. In the fiscal year ending January, 2004, the clothing retailer expects to chalk up its first profit in three years, thanks to smart pricing technology. Using software from startup ProfitLogic, Northern Group combines sales data from each of its 280 stores with inventory data. The system then makes pricing recommendations. Michael Stanek, the Canadian company's chief financial officer recently spoke with BusinessWeek Internet Editor Heather Green about the technology's benefits. Following are edited excerpts of their conversation:
Q: What did it take to deploy the smart pricing technology?
A:We started the implementation on September 1, 2002 and were done November 1, 2002. Our mandate was that we had to have it in place then, since we do 40% of sales volume at the end of the year. It's relatively unobtrusive. It's kind of an add-on system, since it was Web-based.
There was a huge focus surrounding change management with the merchants and buyers. We had to move away from our reliance on instinct. But we have been using it now for about a year and have had a tremendous amount of buy-in, with 98% usage. We rely on it very heavily to make pricing decisions.
Q: So how do you use the pricing system?
A:We have a pricing analyst for each division that uses the software. They look for different trends and nuances, and look at the software's recommendations. Every Monday morning, we sit down with the planning team and the merchant buying team to look at the recommendations to approve or not approve the pricing decisions.
Q: Why did you decide to move from relying on gut instinct to using this software?
A:Our approach is that we see the retail industry really going through what the manufacturing industry went through in the late 1970s in focusing on gross margins and efficiencies. We have enormous amounts of data, and now we have the software to really use that data. We're marrying the science of data analysis with the art of merchandising.
Q: What data does it monitor?
A:It monitors current sell-through rates and current inventory levels, and compares those with three years of prior historical sales rates by store. It's tied into the point-of-sale system and the merchandising system. It basically has the inventory level of different styles, colors, and styles.
Q: How does it help improve gross margins?
A:It has allowed us to create pricing clusters. Instead of doing nationwide pricing, we can have different pricing in different stores based on weather patterns or socioeconomic trends. It tells us how to mark down the product to achieve the highest gross margin dollar for that investment. If we buy 100,000 sweaters, for instance, it tells us how to price those sweaters when they go on sale. It can also tell us that we need to cancel incoming inventory.
Q: Can you give a specific example?
A:Last winter we had some winter coats in our children's department. Our gut instinct was that we should mark down the prices four or five weeks after we started selling the coats. The software said that based on inventory level, we should not mark it down. We decided to listen to the software, and we sold all the inventory and made $120,000 in additional gross margin.
Q: Can you quantify the overall payoff since putting the system in place?
A:Basically, we have seen a substantial increase in gross margin. It's up 3% year-over-year. Inventory is down 15%, and inventory turns are at the highest level in the company's history. This helps us maximize our profit while maintaining fresher products. It has been the leading factor in the company's improved overall profitability.