Price sensitivity in the Minor Sale and optimizing profits for retailers

I was pleasantly surprised to read in Forbes magazine a story about an up and coming software suite that allows retailers to use price optimization to boost sales and profit margins.

Demand Tec has developed software that gives retailers insight into underlying factors in the purchasing decision. For example, one drug store chain used the software program to recognize that buyers seeking cough medicine aren’t likely to shop around. The store raised prices on cough syrup as a result. The software also provides other insights, such as customers who are buying cold medicine also purchase chicken soup and tissues in the same visit. The software then recommended that tissues and chicken soup be moved to the cough syrup aisle.

The software can’t recognize external trends, such as a new Wal-mart opening down the street, but it does help pull retailer’s heads out of the spreadsheets and get them to focus on their customer and why they’re visiting a particular store. One store implemented the software suggestions and increased the price of diapers for newborns while cutting the price of diapers or “pull ups” for toddlers. The pricing move boosted revenue for baby care by 27%and increased the category’s gross margin by 2% after a year!

For those of us who avoid spread sheets when possible, it’s rather obvious the reason why parents of toddlers are more price sensitive than parents of newborns. In the months following the arrival of a new baby (or babies), time is second only to sleep in the precious commodity category. As time goes by and the number of diapers bought and changed multiplies exponentially on a weekly basis, it makes sense that the parent of a 28 month old might be willing to shop around for recurring minor sale expenditure such as diapers.

Which brings us to the door buster theory in Beyond Niche Marketing, the book? It’s all about merchandising. Realizing why customers are coming to you and placing your merchandise accordingly. For example, the article at Fortune notes that a drug store positioned tooth-whitening chewing gum to sell along side with the stores other chewing gum offerings. The software suggestion was to move the tooth whitening gum to the oral care products aisle. When positioned next to the whitening toothpaste and tooth whitening strips, sales of tooth whitening gum increased significantly.

While it’s great to have a software tool that can “think” for you, there’s still no substitute for a real live human being stepping into the customer’s shoes and viewing the shopping experience from the other side of the cash register. The definition of the Minor Sale is that it’s a purchase that doesn’t justify a huge expenditure of time and effort researching alternatives. Because the software can only make suggestions. the humans who run the business have to pick and choose which software recommendations make sense for their customers.