A revolutionary model to optimize promotion pricing – Georgia Perakis

MIT Sloan Prof. Georgia Perakis

MIT Sloan Prof. Georgia Perakis

From The Huffington Post.

Grocery stores run price promotions all the time. You see them when a particular brand of spaghetti sauce is $1 off or your favorite coffee is buy one get one free. Promotions are used for a variety of reasons from increasing traffic in stores to boosting sales of a particular brand. They are responsible for a lot of revenue, as a 2009 A.C. Nielsen study found that 42.8% of grocery store sales in the U.S. are made during promotions. This raises an important question: How much money does a retailer leave on the table by using current pricing practices as opposed to a more scientific, data-driven approach in order to determine optimal promotional prices?

The promotion planning tools currently available in the industry are mostly manual and based on “what-if” scenarios. In other words, supermarkets tend to use intuition and habit to decide when, how deep, and how often to promote products. Yet promotion pricing is very complicated. Product managers have to solve problems like whether or not to promote an item in a particular week, whether or not to promote two items together, and how to order upcoming discounts ― not to mention incorporating seasonality issues in their decision-making process.

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