DECEMBER 2001 T H E F O R R E S T E R R E P O R T

Retail Revenue Management

 The Forrester Report

DECEMBER 2001

Retail Revenue Management

Revenue management systems that optimize prices to

By Carrie A. Johnson
increase margins will curb bad pricing decisions. Retailers
With Lisa Allen
will then integrate revenue and supply chain management
Amy Dash
to make prices even more precise.

2 M A R K E T OV E RV I E W
• Most retailers think Excel is an advanced pricing tool.
• Poor pricing leads to unnecessary margin and profit loss.

5 A N A LY S I S
• New optimization tools fine-tune pricing and increase
profits.
• Apparel and general merchants will lead the industry
in road-testing revenue management systems.

14 ACTION
• Retailers must hire laid-off travel industry veterans with
yield management skills.

Headquarters 15 W H AT I T M E A N S
• Consumers will need bigger pantries for sale items.
Forrester Research, Inc.

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19 ENDNOTES

©2001, Forrester Research, Inc. All rights reserved. Forrester, Forrester eResearch, Technographics, and TechRankings are trademarks of
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subject to change.
 Retail Revenue Management
MARKET OVERVIEW

2
M A R K E T OV E RV I EW

The End Of Imprecise Pricing

Retailers today make pricing decisions based on a blend of intuition
and spreadsheet calculations. This unscientific method results in prices
that aren’t aligned with consumer demand, leaving retailers with excess
inventory, thin margins -- or both.

RETAIL PRICING STRATEGIES ARE STUCK IN THE STONE AGE

The more things change, the more they stay the same. Multichannel retailers today set
prices the same way pushcart merchants in open markets did centuries ago: with their
gut and a particular margin in mind. The problem is that profits get squeezed because
retailers either jack up prices too high, suppressing sales, or shortchange themselves with
paper-thin margins (see Figure 1). Even though new technology can fine-tune prices, it’s
gained little traction with retailers. Among those few that have adopted a more
sophisticated approach, however, retailers consider it their secret weapon -- such a
competitive advantage that few agreed to let us reveal their names.

Retailers Don’t See Any Reason To Change

Retailers that aren’t implementing a new pricing methodology are dragging their feet
because they:

• View eBusiness warily. Retail lags behind other industries in adopting eBusiness
technologies. Twenty-eight percent of retailers are “Followers,” companies that
are committed to eBusiness but have a low tolerance for what they consider to be
risky new technologies; only 12% of all other companies fall into this group.1

• Think Excel gets the job done. Across the board, the more than a dozen
retailers we spoke with -- from grocery to apparel to general merchants -- hail
Excel as the saving grace of pricing, as a major technological advancement. The
big deal? They use the software’s “if, then” function to manage price histories and
business rules.

But They Acknowledge There’s Some Room For Improvement

While most retailers agree that their current pricing methods aren’t perfect, they disagree
about whether newer technology can do more.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
MARKET OVERVIEW

Figure 1 Imprecise Pricing Squeezes Profits 3

Unnecessary Bad pricing

markdowns contribute decisions increase
to net margin decreases the need to liquidate

Thin margins Profit Unsold merchandise

Kmart was stuck with

Tower Records attributes Department store $400 million in excess
a 12.2% decrease in FY ‘01 net margins dropped inventory last year after
gross profit to intense from 5% in 2000 to misreading consumer
pricing pressure 1.6% in 2001* demand for products
from competitors at the right price point

*Source: The Risk Management Association (RMA) Annual Statement Studies 2001-2002; the RMA
defines fiscal year as April to April

Source: Forrester Research, Inc.

“I think if you take the human element out of this part of the business, you’ll lose.
I mean, how can any technology keep track of all of the criteria a buyer must
consider?” (Discount retailer)

“We live and die by Excel. All of the information you could ever want is in there,
but it is cumbersome to get at it. There must be a tool out there that could help
us organize better and find things more easily.” (Home décor retailer)

“With Excel, it’s much easier to price 30 to 40 products at once now. Just hit a button
and boom: Instead of going through and changing the prices of 400 items individually,
Excel does it for us. But it has its limitations: We have to manage zone pricing by
hand.” (Discount retailer)

Old-World Pricing Falls Short On Many Fronts

Using a spreadsheet application to set prices is not only a grueling, manual process, but
it’s imprecise, too. While Excel makes calculations easy, it:

• Can’t incorporate key pricing variables. Excel spreadsheets full of historical

data are better than handwritten charts but can’t factor in complex changes to
prices like revised promotion schedules. A buyer running a special on a set of

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
MARKET OVERVIEW

4 SKUs in only one store because of local competitive pressure -- like a new Wal-Mart
opening down the street -- must enter that variable manually for every item.

• Doesn’t reflect changes in consumer demand. Price parameters around

business rules can be plugged into a spreadsheet, but those rules only represent
supply, not demand, constraints. What’s missing? Besides POS data and promotions
performance, an analysis of cross-elasticities: Increasing the price of Ivory Soap
may also increase demand for Dove, forcing retailers to rethink prices for both
products.

• Doesn’t modify outdated pricing schedules. The unscientific nature of pricing

leads to lost revenue opportunities: Retailers take markdowns on a set schedule
regardless of product movement -- even though consumer receptivity to a higher
price is still strong. The result is unnecessary margin loss. Conversely, when
retailers wait too long to take a markdown, they miss a window of opportunity to
sell to consumers who would have bought the product at a lower price but now
aren’t interested.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ANALYSIS

A N A LY S I S 5

The Age Of Optimized Pricing Begins

Revenue management technology will push Excel into the shadows: By
aligning demand forecasts with profit objectives, it will deliver optimized
prices that maximize revenue. Apparel and general merchants will be
among the first to adopt revenue management, integrate it with supply
chain management, and thereby benefit from increased profits.

REVENUE MANAGEMENT WILL MAKE PRICING MORE PROFITABLE

There is a better way to set prices. American Airlines pioneered one in the ’80s as it
beat cut-rate carrier PeopleExpress at its own game. Although burdened now with
new headaches, American can take credit for having developed yield management,
a component of revenue management, to determine when to undercut its upstart
competitor and when to charge more; ultimately, it bankrupted the cheap-seats airline.
Retailers can play the same game. Revenue management will enable them to set prices
that are in line with both demand and supply (see the October 2001 Forrester Report
“Power Tools For Supplier Profit”).2 Forrester defines retail revenue management as:

The blending of consumer demand forecasts and retailer business rules to optimize
margins and grow revenue.

There are three dimensions to revenue management, and each has its own set of tools
that build on each other to continuously set and modify prices (see Figure 2):

1) A profit strategy sets prices. Instead of relying only on historical data, retailers
should also incorporate current market conditions to make more informed pricing
decisions. By analyzing both current and historical demand curves, as well as cost
data and competitor pricing, price optimization tools generate suggested initial
prices for products to meet goals for sales, margins, and competitive positioning.

2) Yield management adjusts price. As circumstances change due to seasonal

trends or pressure from competitors, retailers need tools that help them know
when and how to change prices. Yield management applications like markdown,
shelf, and promotion optimization tools monitor sales in real time to determine
what will maximize sales -- whether it’s an earlier, deeper markdown for a slow-
moving product or the placement of complementary products on the shelf.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
ANALYSIS

6 Figure 2 Retail Revenue Management Has Three Dimensions

Yie
y

ld
teg

ma
tra

na
s
fit

ge
Pro

me
Revenue

nt
management

Price execution

Dimension Goals Methods

Determine the most Price optimization

profitable price for
Profit strategy a product or the
target margin for a
product category

2 Decide when to take Markdown

markdowns and by optimization
how much

Plan which products Shelf optimization

Yield management to put on the shelf
and how many

Gauge the impact of Promotion

promotions on sales optimization

3 Approve prices Workflow

optimization
Deliver prices and Pricing engine
Price execution promotions

Measure and Analysis engine

refine pricing
decisions

Source: Forrester Research, Inc.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ANALYSIS

3) Price execution implements pricing decisions. Once a merchandiser sets 7

her prices, she needs a way to roll them out to stores and monitor results. Price
execution applications require features that existing ERP systems lack: A pricing
engine that delivers data to POS terminals and analysis tools that enable
merchandisers to monitor the impact of pricing decisions on sales and margins.

Retailers Enjoy Success With Early Revenue Management Trials

So far, so good. The market is still nascent, but revenue management has already
delivered promising results to a handful of pioneering retailers (see the July 23, 2001
Forrester Brief “Retail Revenue Optimization: Timely And Rewarding”).3 It helps them:

• Maximize margins. With just a slight tweak up or down, price optimization tools
pinpoint the price that will both improve margins and drive sales. In eight weeks,
one grocery chain achieved a 16.9% net margin increase with DemandTec’s Price
Center software; it suggested an average 3.8% price hike on nonimage items like
canned beans based on consumer willingness to pay more.

• Eliminate needless markdowns. By adjusting markdown schedules to align

supply with demand, markdown optimization tools drive profitability by reducing
the cost of handling goods. A major department store achieved a 1.5% net margin
gain with ProfitLogic’s Pricing4Profit software by taking fewer markdowns when
demand remained strong while at the same time reducing the frequency with
which employees repriced products.

THE ROAD MAP: HOW TO GET STARTED

With the economy squeezing retailers to seek higher margins and profits, all retailers
have an incentive to adopt revenue management. But because today’s revenue
management tools require a lot of data -- sales history, promotion performance, and
markdown schedules, for example -- those retailers that make frequent price changes
on image items for competitive positioning or that take markdowns on highly seasonal
goods are the ones best-positioned to lead the way. Who are they? Apparel, grocery,
and general merchants. To start, they must follow a three-pronged plan of attack that
involves:

1) Planning. Implementing a revenue management system is not like buying a new

CRM system. This is a new technology that must be explained to key players
within the organization and acknowledged as an integral element of an overall
business strategy (see the September 2001 Forrester Report “Making Technology
Decisions Count”).4

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
ANALYSIS

8 2) Picking a vendor. In this emerging industry, there’s no established, trusted vendor

of revenue management systems like SAP is for ERP -- yet. Every solution is fairly
new and unproven, forcing retailers to evaluate potential vendors by their ability
to survive.

3) Running a pilot. While traditional analytical tools crunch static data, revenue
management software creates complex statistical models from a constantly
changing data set and requires retailers to use real-time data for a successful
test before introducing revenue management for all products, in all stores and
channels.

1) Planning: Revenue Management Must Go Beyond The Buying Organization

Even on a test basis, revenue management represents a huge change in the way retailers
operate. So, the forward-thinking merchant championing a pilot won’t get very far without
budget, buy-in, and assurances about brand integrity. He must:

• Set executive budget expectations. Revenue management is a new line item --

$200,000 to $500,000 for a pilot, $2 million to $10 million for enterprisewide
implementation. While these costs are significant, they’re less daunting than the
$60 million it takes for a CRM project. Further, revenue management directly
impacts sales and profitability in the short term, unlike CRM, for which 57%
of firms can’t calculate ROI (see the March 2001 Forrester Report “CRM: At
What Cost?”).5

• Gain support from merchandisers. Including the merchandising team in

strategy discussions and in the vendor evaluation process will save time and
money. A major drug chain simply stopped using its revenue management
system because neither the vendor nor the retailer bothered to educate them
about its benefits; a lengthy training session was ultimately scheduled, long
after the system could have been working to improve store profits.

• Monitor brand image. Raising or lowering prices to maximize revenue is

great -- unless it comes at the expense of your brand. To measure the impact
of price changes on customer loyalty and price image, marketers must monitor
consumer attitudes as well as financials (see the September 2000 Forrester
Report “Measuring eBusiness Success”).6 A retailer in a pilot with DemandTec
achieved a 2.5% net profit increase but didn’t consider the pilot a success until
surveys showed that its price image also improved.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ANALYSIS

2) Picking A Vendor: Apply Short-, Medium-, And Long-Term Litmus Tests 9

Anyone remember Optivo? Probably not. It’s a familiar startup story -- the vendor with
an exciting new technology but not enough traction with retailers to stay in business. To
avoid signing with a revenue management vendor likely to crash and burn, retailers should
evaluate all comers based on their (see Figure 3):

• Ability to deliver today. Vendors hype subtleties in analytics as a competitive

advantage, but the most successful vendors have intuitive GUIs and paying
customers -- assets that have nothing to do with math. Without an interface that’s
easily customizable, merchandisers won’t buy the system, and the company will go
the way of Optivo. One chief merchant we spoke with described a vendor’s techie
data tables and screens as “laughable” and never even bothered to look at the
system’s analytical functions -- he built his own.

• Readiness for expansion. Retailers must look at a vendor’s ability to develop

existing products into a full suite of optimization tools -- especially important
because no vendor today offers a price execution solution, a key part of revenue
management. Bashas’ Supermarkets uses Priceman for price optimization now
but will be out of luck later if it needs markdown optimization. A better partner?
KhiMetrics, Spotlight Solutions, Mercari Technologies, or Net Perceptions --
members of The Retail Optimization Council (ROC), which plans to create
standard interfaces and data requirements so retailers can work with a mix of
price, markdown, shelf, and promotion optimization tools from various vendors.

• Future integration potential. To keep pace with retailers that will want to
integrate revenue management with other enterprisewide applications, vendors
must have demand chain and SCM vendor relationships (see the October 1, 2001
Forrester Brief “Continuous Demand Management Boosts Margins”).7 ProfitLogic
developed its own demand chain tools but needs an enterprise software vendor
like Retek to give retailers even more visibility into the implications of a pricing
decision so they’ll know the fully loaded costs of an item -- including transportation
and distribution costs.

3) Running A Pilot: Recognize That Data Will Be A Gating Issue

With organizational commitment secured and a selected vendor lined up, retailers will
then have to ensure that their pilots run smoothly. How?

• Limit pilots to a small set of SKUs. A “KISS” -- in this case, a “keep it small,
stupid” -- approach will avoid data overload. ShopKo tested Spotlight Solutions’
Markdown Optimizer on only 341 SKUs in 141 stores to first gain expertise on

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
ANALYSIS

10 Figure 3 Evaluating Vendors On Current And Future Capabilities

Current Optimization Integration

standing suite potential
s
er
m ain ain
st
o n n ch h
cu ow otio nd yc
i l k d lf a pl
ta I ar ice om e m p
Vendor Re GU M Pr Pr Sh De Su Notes
Applied Price optimization product
Predictive planned for Q2 ‘02
Technologies
Focuses on grocery/CPG;
partnership with Nonstop
DemandTec Solutions for merchandise
planning and forecasting
Customers are Best Buy,
i2 Technologies Dillard’s, and Payless
ShoeSource
Member of the Retail
KhiMetrics Optimization Council (ROC);
focuses primarily on grocery
Acquired Talus Solutions to
integrate revenue
Manugistics management with supply
chain management
Capabilities are limited to
Mercari shelf optimization, but
Technologies partnership with i2 and ROC
extends functionality
A Web personalization tool
evolved into promotions
Net Perceptions optimization; customers
include Kmart; member of
ROC; partnership with i2
Industry pioneer now lags;
Priceman offers ability to create
(ACNielsen) demand elasticity curves only
as a custom feature

PROS Revenue Has an industry-agnostic

Management platform but no retail clients

Distribution partnership with

Accenture’s Retail industry
ProfitLogic group; product suite includes
planning and allocation
optimization
Previously separate demand
and supply forecasting
engines now integrated to
Retek give retailers a complete view
of the financial impact of
pricing decisions
Spotlight ROC member
Solutions

Offered Offered via partnership or in development Not offered

Source: Forrester Research, Inc.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ANALYSIS

Figure 4 Multiple Data Types Feed Optimization Engines 11

Inventory
Retail systems Accounting management Point-of-sale

Data inputs Cost Supply Exogenous

Demand data

POS data
Inventory levels Product list Weather
Regional competition Business rules Competitor pricing
Optimization
engine Promotion schedules Planograms Wholesale costs
Price-change history Store locations
Trade allowances
Activity-based costs Stock-outs

Optimized price
Source: Forrester Research, Inc.

the nuances of the system before ramping up markdown optimization in other

product categories. Just that limited test, which generated thousands of calculations,
was enough proof of performance: a 24% gross margin increase.

• Use a mix of data. To get the most value from the test, retailers must provide
vendors with exogenous variables -- data about external events that influence
purchase decisions like promotions, the competition, unseasonably cold weather,
or stock-outs (see Figure 4). Otherwise, when POS data shows no Huffy bike sales
at Toys “R” Us in April in Ohio, price optimization software can’t assess if demand
dropped for the product, the store had no back stock, a late-season snowstorm
kept children inside -- or the price was just too high.

• Expect recommendations for a radical pricing overhaul. After retailers feed

vendors the right data, they’ll get back an unbiased appraisal of pricing patterns --
and possibly the jarring news that past pricing decisions left a lot of money on the
table. That’s when the art of merchandising meets the science of data analytics:
Merchandisers must accept or reject recommendations based on new data-driven
insights.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
ANALYSIS

12 Figure 5 Revenue Management Moves Toward Enterprisewide Integration

Integration
Expansion Revenue
management
Adoption Enhanced tools will integrate
Exploration will spur revenue with SCM:
Revenue management use:
Inception management Retailers will
ShopKo New vendor run revenue
will gain traction: offerings will
American tests Apparel, grocery, management
markdown include Web- analytics on
Airlines and general based price tests
pioneered optimiza- merchants will top of SCM
tion and for brand-new systems to
yield have enough products so that
manage- improves historical pricing incorporate
gross specialty retailers, supply chain
ment data on hand to without any
margins on test markdown costs into
pilot items historical data, pricing
optimization can use the
by 24% decisions
technology

1985 2001 2002 2003 2004 2005 2006

Source: Forrester Research, Inc.

NEXT STOP: REVENUE MANAGEMENT PERMEATES RETAIL

As apparel, grocery, and general merchants wind down their pilots in 2003, revenue
management will grow from an isolated point solution to an integrated enterprise
system that optimizes price based on a wide range of data up and down the supply
chain (see Figure 5).

• 2004 to 2005: The rest of the retail industry will jump in. Retailers pleased
with the results of their pilots will implement revenue management in all product
categories and regions, while previously sidelined retailers will start working with
next-generation software. Unlike earlier versions that required historical data of
products to generate pricing recommendations, upgrades will enable specialty retailers
like The Sharper Image to make pricing decisions about a hot new item based on
a more limited but real-time set of data gathered from the Web and call centers.

• 2006+: Revenue management will be an intra- and interenterprise app.

By incorporating supply chain management (SCM) systems with revenue
management, retailers will further refine pricing decisions. The payoff: Gap will be
able to factor in shipping and transportation cost data from vendors like Manugistics
when making a pricing decision and conversely feed sales results into demand chain
software from ProfitLogic to refine buying decisions.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ANALYSIS

Business Practices And Relationships Will Change 13

Once optimization by the few turns into implementation by the many:

• Dynamic pricing collaboration will emerge. By sharing real-time data, retailers

and manufacturers will improve their performance. Best Buy will develop a Web
service that enables Sony to tie into its i2 Technologies revenue management suite
for updated sales and consumer cross-elasticity data (see the October 31, 2001
Forrester Brief “Executive Overview: Web Services”).8 Sony will see the
effectiveness of its MAP prices and the feature tradeoffs that consumers make
based on price, while Best Buy will cut excess inventory by better anticipating
changes in consumer demand.

• Electronic mechanisms will deliver prices to points of sale. There’s no point

optimizing prices if they never make it to the store floor. Instead of having store
employees manually make price changes, retailers will install wireless receivers
that send price changes from revenue management systems to NCR’s DecisioNet
Electronic Shelf Labels (see the November 2001 Forrester Report “Picking A POS
System”).9

• The vendor landscape will shrink. The limited growth potential of point
solutions will give revenue management vendors one option -- merge or die.
The winners? Vendors that integrate revenue and supply chain management
like Manugistics and Retek, and best-of-breed point solutions like ProfitLogic
and KhiMetrics that complement SCM vendors well. The losers? Point solutions
like Priceman that are neither best-of-breed nor have existing SCM partnerships.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
ACTION

14
ACTION
As revenue management takes root and refines pricing decisions based on costs up and
down the supply chain:

Retailers must prepare data and people for pricing pilots.

For a successful test run of revenue management, retailers must assess data
integrity and merchandiser receptiveness to a new pricing method. Pottery Barn
must begin to gather exogenous data about events that influence purchase
decisions and evaluate whether merchandising teams will be able to learn and
embrace a new pricing system. If teams aren’t up to the task, HR departments
must recruit new staffers who can evaluate supply constraints and consumer
price elasticity when making pricing decisions. How? By raiding the pool of
yield management experts recently laid off in the ailing airline and hotel
industries.

Manufacturers must collaborate to optimize MAP pricing.

Manufacturers must use revenue management to set MAP prices and develop
products based on a real-time analysis of consumer demand and supplier costs.
Wilson Sporting Goods must get data from Finish Line to analyze consumer
preferences and partner with Retek for supply chain visibility. The result? Before
the season starts, Wilson will know whether to maximize football sales by making
them with the premium leather that consumers will pay more for or with the
cheaper leather that can be delivered earlier.

Point solution vendors must turn into M&A targets.

Specialized, stand-alone optimization products won’t last long as more retailers
get hip to revenue management and start demanding more robust solutions.
ProfitLogic and DemandTec must first merge to bring together their markdown
and price optimization capabilities. Then, i2 should grab the companies to upsell
supply chain management to the startups’ clients and quickly incorporate best-
of-breed revenue management solutions into its own less-developed tools.

POS and content management vendors must get in the game.

To optimize the delivery of prices to points of sale, revenue management
vendors need to add price execution to their optimization products. Manugistics
must partner with POS vendor NCR to send prices directly to in-store systems
and electronic shelf labels and create an API with content management vendor
Vignette to deliver prices to catalog systems and the Web.

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 Retail Revenue Management
WHAT IT MEANS

W H AT I T M E A N S 15

Consumers will load their pantries with stockpiled goods.

With price optimization and electronic shelf labels enabling retailers to make
price changes daily or even hourly, inventory risk will shift from retailers to
consumers. A price-sensitive shopper, realizing that the local Kroger drops
prices between 8 a.m. and noon on Tuesdays, will make a beeline for the store
and stock up on nonperishable items like canned tuna and soup. With a sudden
need for more storage space, consumers will hire contractors to expand pantries
and install new food-storage shelving in basements.

Marketers will simultaneously drive and suppress demand.

With both consumer demand and manufacturer supply data at their fingertips,
marketers -- masters already at stoking demand for a product -- will also stomp
it out. Thanks to an analysis of product interaction data from revenue management
systems, Macy’s marketers will know that sales of Izod shirts decrease sales of
higher-margin Polo shirts, so they’ll increase the price of Izod shirts. Performance
metrics will change to reward marketers for this new skill: Campaigns will be
deemed a success if they increase store profits, not just sales.

X-Internet sensors will streamline data collection.

Instead of scrambling to gather supply, demand, and exogenous data to feed
revenue management systems, retailers will install sensors to collect the data
for them. Sears will place sensors on the outside of stores to record weather
fluctuations, equip trucks with GPS locators to estimate delivery times, and
embed RFID chips into products to measure shrinkage. Later, it will lay off
employees dedicated to data gathering, further increasing net profits by lowering
activity-based costs.

Stores will offer personalized prices.

One-to-one pricing will finally become a reality as retailers integrate CRM with
revenue management and discover individual consumer preferences. Consumers
in Target stores will wave products and loyalty cards by in-store price scanners
and be presented with a 20% off coupon to print out and redeem at the register.
How will it work? Target’s CRM system will know that this consumer has previously
scanned the exact same product four times to check the price but never bought
it, and its revenue management system will create the discount based on targeted
margin goals and current stock levels.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
REL ATED MATERIAL

16
R E L AT E D M AT E R I A L
Research Summary
We spoke with 15 retailers with an average of $4.2 billion in annual sales, and Dr. Hau
Lee, Professor of Operations, Information, and Technology at the Stanford University
School of Business and the Kleiner, Perkins, Mayfield, Sequoia Capital Professor of
Engineering at the Stanford University School of Engineering.

Sources For This Report

@TheMoment Net Perceptions
www.atthemoment.com www.netperceptions.com
Accenture Nonstop Solutions
www.accenture.com www.nonstop.com
ACNielsen ProfitLogic
www.acnielsen.com www.profitlogic.com
Applied Predictive Technologies (APT) PROS Revenue Management
www.predictivetechnologies.com www.prosrm.com
Callidus Software Rapt
www.callidussoftware.com www.rapt.com
Contextual Retek
www.contextual.com www.retek.com
DemandTec ReturnBuy
www.demandtec.com www.returnbuy.com
Excess Technologies Revenue Technologies
www.excesstechnologies.com www.revenuetech.com
i2 Technologies Slingshot Solutions
www.i2.com www.slingshotsolutions.com
KhiMetrics Spotlight Solutions
www.khimetrics.com www.spotlightsolutions.com
Manugistics Viewlocity
www.manugistics.com www.viewlocity.com
Mercari Technologies Zilliant
www.mercaritech.com www.zilliant.com
MoonBuzz
www.moonbuzz.com

Related Research
October 1, 2001 Forrester Brief “Continuous Demand Management Boosts Margins”
October 2001 Forrester Report “Power Tools For Supplier Profit”
September 2001 Forrester Report “Making Technology Decisions Count”
July 23, 2001 Forrester Brief “Retail Revenue Optimization: Timely And Rewarding”

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
GRAPEVINE

GRAPEVINE 17

Gathering price-sensitivity data on Fifth Avenue.

At the recent ShopEast Conference in New York City, a Forrester analyst met with
JesterTek, a vendor that allows retailers to install window displays that consumers
control simply by pointing at the glass. We see the system as an opportunity for retailers
to gather real-time, demand-pricing data. If a Saks window display features a cashmere
scarf on a computer display for $200 and only a handful of window shoppers stop to point
to the screen for more information, the retailer can change the price to $175 to see if the
new price draws any more interest.

……

Pornography and revenue management go hand in hand?

An intuitive GUI is a must-have for vendors pitching revenue management products to
retailers, but just how easy to use should the system be? One vendor -- which shall remain
nameless -- says designers should keep the average Joe in mind when building screens:
When asked about his system’s interface, this CEO replied, “If you can buy porn online,
you can use this tool.” Sounds pretty easy to use -- but we really wouldn’t know.

……

Huge holiday Gap between sales and profit.

In the waning days of Christmas 2001, full-price merchandise was about as hard to come
by as a GameCube. In response to same-store sales dropping 25% in November, Gap
emailed coupons to gap.com registrants for 15% off sale items and 30% off nonsale
items. Add in the millions that the company spent on celebrity endorsements from the
likes of Alanis Morissette, and Gap’s profits come January will be ugly. Forrester hopes
that Santa is watching and gets Gap a revenue management system with markdown and
merchandise planning optimization to keep it from giving away the store next year.

……

Prescription for Peapod’s pricing headache: revenue management.

Back in online grocery’s competitive heyday, Peapod advertised that its online prices
were the same as in its brick-and-mortar Stop & Shop stores. Peapod later reversed this
policy and raised prices -- but without notifying customers. Peapod claims it was an
oversight, but a recent settlement with the State Attorney General in Massachusetts
requires the online grocer to shell out more than $200,000 in restitution. What a pity
poor Peapod wasn’t practicing revenue management. The workflow tools built into
today’s pricing systems closely link marketing and merchandising teams, making it easy
to avoid costly mistakes.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001

 Retail Revenue Management
GRAPEVINE

18 QVC corrects comScore.

A recent Forrester brief about conversion rates provided by our data partner, comScore,
caught the eye of QVC’s VP of Interactive Operations, Steve Hamlin. comScore data
showed that QVC.com averaged a 2.5% conversion rate for the first six months of the year,
but Hamlin claimed it’s closer to 12%. We checked with comScore, which acknowledged
the error and explained that comScore failed to pick up on changes QVC had made to its
checkout process. With its healthy double-digit conversion rate, QVC.com ranks in the
top tier of high-performing eCommerce sites.

DECEMBER 2001 ©2001 Forrester Research, Inc. Reproduction Prohibited

 Retail Revenue Management
ENDNOTES

ENDNOTES 19

1 Findings are based on Forrester’s Business Technographics September 2001 North America
Benchmark Study of 1,016 senior executives at US-based Global 3,500 companies conducted from
April to June 2001.

2 Revenue management is a component of a process that Forrester calls “continuous demand

management,” which is defined as an iterative, technology-assisted process to reduce demand
variability. Continuous demand management consists of three components: 1) demand planning;
2) inventory management; and 3) revenue management.

3 An early adopter of revenue management, ShopKo, achieved a 24% gross margin increase with
Spotlight Solutions’ Markdown Optimizer, and a drugstore chain achieved a net profit increase
of 430 basis points in a pilot with DemandTec.

4 An age-old schism exists between technology investments and business requirements, characterized
by technology decisions made with ambiguous business backing and business decisions made with
limited technology considerations. Firms must instead practice business-owned technology spending:
A decision-making process that includes technology spending as an inextricable part of business plans.

5 Even though 82% of 1,026 firms in Forrester’s Business Technographics Q1 2001 North America
Benchmark Study report that they have CRM implementations planned or in progress, most cannot
track the ROI of these implementations.

6 Companies need to measure eBusiness by setting goals that include end-customer success, since
traditional metrics are no longer enough.

7 Firms will embrace management strategies that build in feedback loops from downstream processes
and current market conditions.

8 Web services technology enables firms to interconnect software systems faster and cheaper: A
company can let selected partners tie into its systems by deploying Web services that respond only
to authorized requesters. For example, American Express will use Web services to let travelers get
flight information updates. This beats trying to impose a proprietary technology on all customers,
partners, and business units.

9 New connectivity and applications in the store will provide access to “smarts” everywhere. Clerks
will carry multifunction Symbol handhelds, prices will appear on NCR wireless shelf tags, and
E Ink’s Ink-In-Motion digital displays will offer personalized promotions to customers at checkout.

©2001 Forrester Research, Inc. Reproduction Prohibited DECEMBER 2001