Practice Papers: Retail revenue management and the new paradigm of merchandise optimisation

Abstract

In retailing, the primary objective of buyers and department merchandise managers is to profitably fulfil customer demand for its products at diverse demographic locations. This paper presents a new paradigm for merchandise optimisation to facilitate exception driven closed loop planning to achieve the desired merchandising goals. At the core is a planning paradigm which synchronises the financial plans, product plans, store plans, key item plans and assortment plans to serve customer demand and promote loyalty. Tailored assortments, based on the unique attributes of each store, at the optimal price point for each product in a store maximises sales efficiency and profitability. The optimal price point for each product is a function of the state of the product in its life cycle from introduction to clearance. Life-cycle pricing stages include new product introduction, category pricing, promotions and mark-downs. Besides providing a quick return on investment by maximising margin improvements in the 5 per cent range, the components of product life-cycle pricing play a pivotal role in merchandise planning as a demand lever in shaping demand to offset variances in the plan, to ensure that sales and revenue targets established during the merchandise planning process are met.