A Practical Price Optimization Approach for Omnichannel Retailing

Consumers are increasingly navigating across sales channels to maximize the value of their purchase. The existing retail practices of pricing channels independently at the one end, and matching channel and competitor prices at the other, are unable to achieve the desired profitable coordination required between channels. As part of a joint partnership agreement with IBM Commerce, we engaged with three major retailers over two years, and developed advanced omnichannel pricing (OCP) solutions that are used by several retail chains today. We develop an omnichannel framework to model location-specific cross-channel demand interactions. An integrated OCP optimization formulation profitably coordinates prices for non-perishable products across channels and store locations, while satisfying a variety of business rules, and taking into account the impact of competition, and sales goals. We present the OCP formulations with and without assortment effects. The resultant non-linear models are non-convex and NP-hard, and practically efficient optimization approaches are prescribed, along with computational results using real-world data. An OCP implementation for a large retail chain projected a 7% profit lift. IBM Commerce deployed proprietary versions of these models into production in 2014.