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Practice Prize Report—An Assortmentwide Decision-Support System for Dynamic Pricing and Promotion Planning in DIY Retailing

Johann Wolfgang Goethe-University Frankfurt, Mertonstr. 17, D-60054 Frankfurt/Main, Germany
Vienna University of Economics and Business Administration, Augasse 2-6, A-1090 Vienna, Austria
Vienna University of Economics and Business Administration, Nordbergstr. 15, A-1090 Vienna, Austria
Vienna University of Economics and Business Administration, Nordbergstr. 15, A-1090 Vienna, Austria
natter{at}wiwi.uni-frankfurt.de
thomas.reutterer{at}wu-wien.ac.at
andreas.mild{at}wu-wien.ac.at
alfred.taudes{at}wu-wien.ac.at

The main objective of this report is to describe a decision-support system for dynamic retail pricing and promotion planning. Our weekly demand model incorporates price, reference price effects, seasonality, article availability information, features, and discounts. Building on previous research, we quantify demand interdependencies and integrate the resulting profit-lifting effects into the optimal pricing model. The methodology was developed and implemented at bauMax, an Austrian do-it-yourself retailer. Along with the practical requirements, an objective function was employed that can be used as a vehicle for implementing a retailer’s strategy. Eight pricing rounds with thousands of different stock-keeping units have each served as a testing ground for our approach. Based on various benchmarking methods, a positive impact on profit was reported. The currently implemented marketing decision-support system increased gross profit on average by 8.1 and sales by 2.1%.

Key Words: reference price; demand interdependency; revenue management; retail strategy; pricing research; dynamic pricing
History: Received: August 1, 2005;