Transcript Optimization of EDVP in Retail and E

Optimization of EDVP in Retail
and E-Commerce
Y.-H. Chen, Ph.D.
Information Engineering / IC
Ming-Chuan University
Every-Day-Value-Price (EDVP)
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Utilized by US businesses in 2001.
Increase sales by having more people
visit the stores or web sites (increased
in-store traffic) through the offer of
good deals on popular products.
Convenience of shopping at one place
for the whole family.
EDVP Businesses
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Super Wal-Mart,
K-Mart (Blue-Light Merchandise),
Target,
Amazon,
Tom Thumb, Kroger, Albertson,
…, and other retailers.
EDVP Problems
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Decreased sales due to (inappropriate) EDVP
products.
Increased store traffic is below expectation.
Increased store traffic does not cause sales of
other products.
Reduced profit of EDVP products offsets
increased sales of other products.
Negative profit due to low or free EDVP
product prices.
EDVP Problems (con’t)
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Lack of knowledge about …
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the magnitude of price mark down needed,
and
its quantitative impact to the sales of other
products.
EDVP Objective and Decisions
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Objective: Maximize profit gain
Decisions:
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What products are good candidates for
EDVP products?
How much price mark down?
Store traffic v.s. real demand?
EDVP Model
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Assumptions
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EDVP v.s. non-EDVP products.
Sufficient product supply.
No product disposal cost.
Increased sales of non-EDVP products is
independent with the demand distribution
of EDVP products.
EDVP Model (con’t)
EDVP Model (con’t)
max
E (TP )
s.t. 0  x  p
where
TP  NP  NP  ( p  x  c)Q  ( p  c)Q  ( p  c )(Q  Q) R
EDVP Optimization
x
max E (TP)  k  x 
a
s.t. 0  x  p
where
k  aq  ( p  c)  r ( p  c )
and
k
*
x 
2
2
k
E * (TP ) 
4a
EDVP Optimization Chart
EDVP Business Strategy #1:
Price Mark Down Decision
1.
If the computed optimal price mark down is not
feasible, we should not consider price mark down or
we should give away the EDVP product for free
(Corollary 1).
EDVP Business Strategy #2:
Product Selection
2.
We can improve the optimal profit gain
further by using different products in our
problem (Corollary 2 and Lemma 2.1).
k  aq  ( p  c)  r ( p  c )
and
k
*
x 
2
2
k
E * (TP ) 
4a
Business Strategy #3:
Product Selection Details
If we consider different products to improve
the optimal profit gain, we can use any
combination of the following methods:
3.
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Replace any or both products with the ones
having higher unit profit (Corollaries 3 and 4).
Replace any or both products with higher
correlation between their demand quantities
(Corollary 5).
Use a highly elastic product as our EDVP product
(Corollary 6).
Business Strategy #3:
Product Selection Details (con’t)
Grocery Chain Example
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Watermelon: unit cost $1.00, unit price
$5.99, unit profit $4.99.
Beef (per pound): unit cost $2.00, unit
price $8.99, unit profit, $6.99.
Historical watermelon demand: 2000
units.
Traffic and demand ratio: 0.80.
Grocery Chain Example (con’t)
Grocery Chain Example (con’t)
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Mark down watermelon unit price by
$3.29, i.e., unit price becomes 5.993.29 = $2.70.
Watermelon sales is increased by 1645.
Maximal net profit gain from the price
mark down is $1353.84 for a weekend.