Strategic Shoppers & their effect on retail inventory management and variable pricing

by Deepak Sharma on Monday, June 04, 2007

Knowledge@Wharton is running an article on how retailers need to focus on Strategic Shoppers to reap the full benefits of lean retail inventory management and variable pricing.

Some shoppers just can't help themselves and buy mostly on impulse without regard to price. Others are die-hard bargain hunters, who only open their wallets for a discount.

Then there are the strategic consumers, who are willing to buy full-price sometimes, but at other times they will wait for a bargain. According to new Wharton research, it's these customers that retailers need to focus on in order to reap the full benefits of lean retail inventory management and variable pricing.

In a paper titled, "Purchasing, Pricing and Quick Response in the Presence of Strategic Consumers," Gérard P. Cachon, professor of operations and information management at Wharton, and doctoral student Robert Swinney show how lean inventory systems are far more effective than initially thought in helping retailers determine the ideal size of their orders and the best markdown strategies when taking strategic buyers into account.

"The consumers are thinking 'Should I buy it now or later?' They form expectations about how likely it is the item will be around and how big the markdown will be," says Cachon. "If a strategic consumer concludes the markdown will be big and available, they will wait. There is an interaction between retailers and consumers when it comes to deciding on pricing and quantity.... They are playing a game."

The research shows that when strategic consumers are factored into a theoretical model, lean inventory -- or so-called "quick response" -- systems are, on average, 67% more profitable.

Download the Research Paper here.