Report: Outdated Retail IT Crippling Price Optimization

A propensity to rely on outdated technology developed in-house has caught up with many retailers that, struggling to eke out profits during a recession, now want to adopt complex price localization campaigns, according to a study of 85 retailers by Retail Systems Research (RSR).

The researchers found that 57 percent of the retailers they categorize as "laggards" in terms of adopting price localization cited their technology infrastructures as being a "gating factor" preventing them from delivering differentiated pricing. Forty-seven percent of the companies RSR labels "winners," those with average sales growth of three percent, told RSR that technology was impeding their localized pricing desires.

"It's the entire technology infrastructure, particularly the integration bus," said RSR Managing Partner Paula Rosenblum. She added that retailer IT departments might not be fully to blame for the inadequate backend foundations that are making price localization difficult. They often have trouble convincing CEOs about the value of upgrading integration infrastructure because those projects often do not yield easily seen, immediate benefits, said the analyst. "The return on investment is down the road, and in a user-driven environment it's hard to explain, in any rational fashion, why it is you have to do this thing."

Unfortunately, when revenues begin tanking during economic downturns, and companies look for ways to leverage technology to help them stay afloat, they find their long-in-the-tooth homegrown systems aren't up to the task. "Retail has historically been a grow-your-own or buy-a-packaged-application-and-customize-it-to-death universe," Rosenblum said. "That all worked fine for some period of time as long as all you are doing was keeping score. Retailers believed there were things about their businesses that were unique, but things weren't, in fact, unique. As a result, they got themselves in this homegrown technology mess. This is coming back to haunt them."

Retailers have "tons of point-to-point information, poorly documented and typically managed through single points of failure where only Joe The Programmer knew how to do it," according to Rosenblum. "Now, all of a sudden, they want to expand their portfolios. They have POS systems that are so old they could probably vote if they were humans, and now they want to extend them with price optimization. But getting the integration pieces together is an enormous issue, particularly in an era where money is tight."

Making Progress

Getting clean price data seems to be one of the major problems. In its report, RSR found that 69 percent of the responding retailers prized getting clean price data but only 33 percent said they actually used it.

"Some of the biggest inhibitors to taking advantage of pricing opportunities come from areas that span multiple organizations--clean pricing data, for example, might seem like the domain of merchandising, but pricing decisions all still have to go through Point of Sale systems, logs and audits before they enter the realm of price management organizations and technologies," the report said. "Right behind pricing data, organizational capabilities loom as some of the biggest gaps--both in terms of coordination between merchandising, marketing and stores and in executive sponsorship."

Based on its study, RSR said there was a "wild evolution" during the course of 2008 in retailer opinion about the importance of, and plans for, promotion optimization. The enthusiasm level declined in mid-year as retailers "realized the implementation adds a layer of complexity over and above price optimization alone" and required clean data about customers they wanted to target as well as clean price history information. "However, by the end of the year, promotion optimization once again regained a very high place in terms of adoption plans," the report said. "Retailers have realized that targeting customer segments is critical to maintaining consumer engagement in an age of declining demand, no matter how difficult it might be to pull that information together--and big plans for customer data warehouses demonstrate that retailers are prepared to tackle that challenge."

Although RSR said retailers have made progress in terms of their pricing capabilities, it warned that "pricing and price optimization will rapidly hit a wall in terms of future potential if organization and process integration is not included alongside the technological integration currently underway."

Rosenblum said retailers that want to increase revenue through pricing optimization but are stymied by their infrastructures should consider outsourcing. "When it comes to pricing practices, see if you can find a way to use non-intrusive techniques," she advised. "Ship the data off to someone else. Sometimes the best thing to do is ship it off to somebody and let them manage the data and give you back what the optimized prices are. Don't try to keep it behind your own firewall."

And while they're doing that, retailers shouldn't continue ignoring the problems behind that firewall. "Fixing the infrastructure, cleaning the bus, is something you have to lobby for over the longer term," Rosenblum said. "It is important, and it has to be done."