August 24, 2020
7 min read

How Dynamic Price Optimization Benefits Fashion Retail

In the last dynamic pricing blog on coupons and bundles, we touched on industry-specific differences that can be crucial to a retailer’s success. Now, let’s take a closer look at one specific vertical: fashion retail.

Fashion retail offers great potential for dynamic price optimization because the average margins are comparatively high. This reason alone means that applying AI for price optimization offers a great deal of leeway and creates a large lever for profit potential. Nevertheless, a few technical and strategic requirements should be considered in order to generate the maximum benefit from a dynamic pricing software solution.

Short product lifecycles

The lifecycles of many items in a fashion assortment are short - often only about 4 to 6 months. During this short period of time, an item must be launched successfully, generate as much profit as possible in its peak season and sold out on time to free up stock for the next season. Take swimsuits for example, as a product that’s often introduced early in spring for a summer target, before warmer clothing replaces its inventory in the fall. The more excess inventory on the shelf and in the backroom come September, the less profitable a retailer is. Therefore, it is particularly important to adjust prices regularly and strategically. 

Dynamic pricing software can support these requirements by:

  • Offering various algorithmic procedures for pricing during all phases of the product lifecycle.
  • Allowing control of the optimization target (revenue, sales, profit, etc.) for each product and for each product group.
  • Providing relevant, demand-based prices at least daily. 

Broad and deep assortments

Fashion assortments are usually both broad and deep. This means that they contain many different items and many variations of these products. Think about the number of dresses, skirts, pants and shoes you see in one store – as well as the number of sizes and colors. This results in both technical and strategic requirements if the product range is to be dynamically priced. 

In order to cater to this need, dynamic pricing software must have a master-variant capability. This means that in the algorithmic calculation of demand, and in the final pricing, products can be treated separately from each other based on unique variations, such as size or color. This should be done because women’s running shoes in size 10 are likely to have different demand than size 7. Pricing software must therefore be able to calculate and provide output for master and variant prices of products.

What’s more, the software must be able to process large and complex data volumes. Fashion assortments consist on average of 20,000 to 50,000 items, and when variants are included this number climbs up to several million. A dynamic pricing solution must scale linearly so that it is possible to record the demand for each individual item at variant level, derive price elasticities and sales forecasts, and output-optimized prices. This also forms the basis for sales and inventory forecasting.

Promotions and marketing

Promotions and marketing campaigns are an integral part of every fashion season, as well as part of customer expectation. In order to be successful and profitable with promotions, two things are crucial: You have to promote the right items to increase customer frequency, and you need to set the right prices for all non-promotional items. With this combination, promotions achieve great success because the promotion itself drives customer frequency, and dynamic pricing keeps the margin of all other products at a stable level. In this way you increase frequency, sales and profit at the same time. 

AI-based pricing software can further support marketing campaigns by:

  • Suggesting products for marketing campaigns that are relevant and timely for customers.
  • Differentiating between promotions and "normal" purchasing behavior so that promotions do not lead to a reduction in the general price level.
  • Ease of use so that promoted products can be excluded from the algorithmic price calculation with just a few clicks.

A software solution for dynamic price optimization should fit into your existing processes as seamlessly as possible. It should also use and supplement the wealth of experience and knowledge of your pricing managers to achieve sustainable growth. For fashion retailers, not being able to optimize based on factors like short product lifecycles, broad and deep assortments and promotional campaigns should be a dealbreaker. Where do you stand in your dynamic pricing efforts?