A couple of weeks ago one reader of this weblog, brainstormed a bit with me about future application of RFID technology. Obviously once you know where all (!) your items are, you can allocate and price them accordingly based on criteria like weather forecasts, coming holidays or any other exceptions of regular buying behavior. But consider Wal-Mart or any other bigger retail chain with millions of items in stock. How you handle pricing for all these items in thousands of locations to achieve the best possible pricing? Even without RFIDs it is very difficult to set the right price for any item. An interesting article from Fastcompany gave me some enlightment.

"Most companies are desperate to raise prices. And virtually every company has the same lament: We can't. Customers won't stand for it. Competitors will undercut us. And technology will disrupt us -- again. Jack Welch saw it back in 1996, when he famously complained, "There is no pricing power at all." The environment is even tougher today."



Most executives are surprisingly in the dark when it comes to setting prices. They guess; they say a prayer; they cross their fingers. They are afraid to disclose what they don't know .



If there are pioneers in the world of scientific pricing, they are the airlines. In the 25 years since deregulation, the airlines have honed an obsession with prices -- their own and each other's -- that is legendary. Typically, says Lancaster, the airlines collectively change 75,000 prices a day. On the morning after someone files a 7 PM sale, there might be 400,000 price changes across the markets.



A couple of years ago, Schwartz began to look for a better way, and he found a half-dozen companies offering software to automate the markdown process. It works somewhat like airline-pricing software: The computers absorb several years' worth of data, look at what's in stores and how it's selling, and spit out recommendations for prices on specific clothing items. Casual Male picked ProfitLogic, a company based in Cambridge, Massachusetts that is also working with the Home Depot, JC Penney, and Old Navy. During the first year, Casual Male did a test across six departments in all of its stores. Schwartz's buyers would tell the ProfitLogic software what inventory they wanted to move, what the price was, and, most importantly, when Casual Male wanted to be sold-out (or when the chain wanted to have a certain amount left to be sold at its outlet chain).



"How do companies set their prices?" asks Warnock. "Three ways. There's cost-plus. There's 'because my competitor did it.' And then there's what we call OTA pricing. Politely, that's 'out of the air.' Companies say, 'We price what the market will bear.' But they do nothing to measure what the market will bear."



Zilliant software runs experiments. You pick a goal -- maximizing total profits, for instance -- and then you start selling stuff, the same stuff, in fact, just at slightly different prices. You don't just take a flier and raise your prices 5% and see if anyone flees to a competitor; you don't just drop your prices 15% and hope that the price brings in 20% more business. You test, you sell, you gather data -- you see what works. Then you change your prices -- maybe 4% up, maybe 6% down -- when you know what's going to happen.

In saturated markets, like many parts of retail pricing is going to more and more important the right number crunching can really make a difference. This proposition has convinced many VCs, so the sector has attracted considerable amounts:

• ProfitLogic - received $ 34.5 million since 2000


• Zilliant - $ 20.6 million since 2002


• Revenuetech more than $ 10.8 million since 2001


• Spotlight Solutions received $ 15.5 million since 2001 and was acquired by ProfitLogic in 2003


• Demandtec - received $32.7 million since 2000

All companies suffer from intense and expensive integration with clients ERP systems. They also need time until the full optimization of pricing is in place due to experimentation with pricing strategies. The question is also if the positive effects of use of software persist over a long term period. Also the group of clients for whom an ROI is easily reached seems to be limited to a few chains, where investment of some millions in software and consulting pays off, if the margin can be increased by a small percentage. However pricing technology is really an amazing combination of math and gut feeling combined with technology.