Retail, CPG and Logistics

AI-based markdown optimisation: Discount engages customers

“True optimisation is the revolutionary contribution of modern research to decision processes.” ~ George Dantzig

Has winter made cotton sales go cold? Or maybe, sales predictions are just way off the actuals. Whatever the reason, the pressure is on salvaging the stock. An effective way is to mark down the price. Although it is a strategic move meant primarily for stock clearance, no business wants to achieve it by suffering a loss.

Markdown, therefore, is an act of carefully balancing accelerated stock clearance (by pricing it low) with higher profit margins (that risks slow-moving stock). For retailers (especially apparel retailers), it has become somewhat of an end-of-season ritual today, so much so that styles are invested in just to sell a percentage of the stock at a markdown. Whatever this share, markdown management is critical in achieving the best possible results.

Markdown management methodologies

There are various approaches to markdown management. The two most widely used ones are rules-based and optimised.

Rules-based approaches:

1.  Fix the discount, say at 25 per cent on outdated styles, progressively increasing it till the stock is cleared.
2.  Take advantage of the left-digit effect and bucket products (into low, medium, high) with a .99 price ending tag (4.99, 29.99, etc.)
3.  Simplify communication and execution by a pan-location single markdown pricing.
4. Vary markdown prices based on the current price of a style and/or location.

Optimised approach

Experience has taught retailers that to maximise sales margins, the rules-based approach alone is insufficient. It calls for a more sophisticated approach that can give businesses a competitive edge with optimised solutions.

Markdown optimisation

These four questions uphold markdown management:

1. What product(s) should be put on clearance?
2.  Where should the clearance happen?
3.  When should the items be sent to clearance?
4. How deep should the clearance price be?

Markdown optimisation answers all these by factoring in shelf-life, inventory levels, current selling price, lifecycle stage, market landscape, seasonality and trends. Too many variables, each with different levels of impact on the outcome, make markdown optimisation a complex activity. Add to this the limitation of the human mind that cannot fully comprehend the effect of the next five per cent markdown; the need for a technological solution will become instantly apparent.

It's again AI (artificial intelligence) and big-data analytics that come to the rescue.

Entrust complex operations to big data and artificial intelligence (AI)

An important activity for markdown optimisation is the study and trade spend analysis of historic data. Use it to predict markdown levels, timing and product(s) that are to be marked down. However, the sheer volumes of data (wide product range, different prices) and the scattered sources (point-of-sale systems, website transactions and mobile transactions) make it difficult for traditional technological tools to do this task. This is where the power of AI and big data can be harnessed. These technologies can readily transform the insights of an organization and help them become more networked and connected.*

Their unique capability to access data from multiple channels, organise them in a specific format as datasets and subject the large datasets to extensive analysis makes big-data analytics a winner. And their power is not limited just to large data processing. The prediction models available today can perform complex operations (such as weighing the influence of parameters and figuring out correlations among them) much more accurately and faster than a human brain. It is, therefore, a matter of training the model to achieve the right balance that helps hit sales targets.

Markdown optimisation aided by AI and analytics drives results

Retailers looking to transform their markdown strategy must leverage AI and analytics for the many merits that they hold:

1. Accelerated decision-making (optimum discount, market timing) with high precision and accuracy
2. Instantaneous what-if and financial impact analysis
3. Coherent markdown execution potential (across several channels).
4. Outcomes and KPIs monitoring
5. Increased revenues
6. Inventory control
7. Automated, yet flexible to adapt different pricing tactics

Whether a necessary evil or a powerful tool in the hands of the merchandiser, the answer lies in the shrewdness of the practitioner and the sophistication of his analytics portfolio. An optimally designed markdown will have just the minimum depth and duration (depending on brand positioning of the product, its lifecycle stage, current price concerning competition, current stock levels and prevalent sales trends) to generate demand at discounted prices but comfortable profits.

* For organizations on the digital transformation journey, agility is key in responding to a rapidly changing technology and business landscape. Now more than ever, it is crucial to deliver and exceed on organizational expectations with a robust digital mindset backed by innovation. Enabling businesses to sense, learn, respond, and evolve like a living organism, will be imperative for business excellence going forward. A comprehensive, yet modular suite of services is doing exactly that. Equipping organizations with intuitive decision-making automatically at scale, actionable insights based on real-time solutions, anytime/anywhere experience, and in-depth data visibility across functions leading to hyper-productivity, Live Enterprise is building connected organizations that are innovating collaboratively for the future.