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Applications

Retail technology priced to sell

Software that can help figure out why consumers buy a particular product has become the latest battleground for Oracle and competitors.

A correction was made to this story. Read below for details.
Apple Computer has the marketing savvy to deliver the Mac, iPod and other consumer hits. But when it comes to pricing its products, the company sometimes needs help.

In order to find a pricing strategy that can quickly adapt to shifting consumer trends--and translate into millions of dollars in new sales--Apple earlier this year said it turned to Rapt, a maker of specialized pricing optimization software.

Apple "came to us to build a more rigorous pricing strategy; essentially these companies are saying they've hit a wall...on pricing," said Tom Chavez, Rapt's chief executive.

Predicting sometimes fickle consumer buying habits is becoming more science than art, said analysts. "It's a lot harder to understand why you might have sold more of one color T-shirt than another color, versus some other kinds of products, but that's exactly what this software is trying to tell you," said Laura Preslan, an analyst with AMR Research. "To the extent that retailers can eliminate guess work, they'll usually see results very quickly."

News.context

What's new:
Consumer-products and retail companies are turning to sophisticated pricing tools to help see beyond the data in their ERP and CRM systems and figure out subtle trends that directly affect how their products are purchased.

Bottom line:
With Oracle buying into the market via its acquisition of ProfitLogic, and smaller companies such as Performance Retail and Notiva merging operations, the pricing-software landscape is undergoing significant changes. With other major applications makers such as SAP and Siebel Systems hot to compete closely for deals in the retail space, experts are predicting that there will be even more consolidation in the so-called pricing optimization sector.

So it should come as no surprise that Oracle, a giant in the market for business software, has pounced on pricing optimization as the next big thing. The company bought ProfitLogic--a Rapt competitor--last month, effectively planting its flag in what analysts see as one of the fastest-growing areas in the retail software industry. (CNET Networks, publisher of News.com, is also a Rapt customer.)

Pricing optimization is a market that Oracle couldn't afford to ignore, co-president Charles Phillips told CNET News.com. Pricing software "is really the high ground in retail right now."

Preslan and others say it's only a matter of time before Oracle's rivals, such as SAP and Siebel Systems, follow suit. And consolidation among the handful of pricing-software specialists will likely follow, she said.

"Oracle, SAP and Siebel have all identified retail as a market where they want to compete for more deals, and building out pricing applications is at the top of their list of goals," said Preslan. "These companies have built the underlying systems needed to power this kind of complex retail technology; they're looking to piece-in the sort of specialized retail expertise that a ProfitLogic can bring."

As further proof of the consolation trend, earlier this week two smaller companies in the pricing optimization space, privately held Performance Retail and Notiva, announced that they would merge operations. Executives at the companies cited competition from larger players, including Oracle, as a primary motivator for the merger.

ProfitLogic marked the second significant retail-technology acquisition made by Oracle in the last six months alone. In March, the company bought out Retek, a provider of retail supply chain software, for roughly $700 million, but only after engaging in a bidding war with rival SAP for control of the company. Oracle has said publicly that it will use the products acquired via Retek and ProfitLogic together as part of its push further into the retail sector.

Preslan said the market for more-specialized software is heating up as Oracle, Siebel Systems, SAP and others look for new ways to build revenue. Where those companies once specialized in applications designed to meet the needs of any type of business, the dearth of big deals continues to press the enterprise players to invest in specialized tools that appeal to smaller groups of customers.

A number of companies with pricing expertise could be on the radar of Oracle's rivals. Applications makers including Rapt, Retalix and Zilliant  

Correction: This article incorrectly identified Laura Preslan. She is an analyst for AMR Research.
are already providing their customers with technology that promises similar results.

For now, Oracle's rivals remain cagey on their latest plans in the pricing sector. SAP declined to comment for this story, and Siebel Systems denied that it needs to make a move anytime soon.

Laurent Pacalin, general manger of CRM at Seibel acknowledged, however, that there is certain to be activity in the pricing-software market. "I think you're going to see a lot more of these companies consolidating because you cannot survive on something like retail pricing alone. The algorithms are so specific for an industry like that, that they do not apply directly to other areas of business, and we already look at pricing across many other industries."

What's the big deal?
For retailers, pricing-software offers a more sophisticated method for addressing issues of supply and demand that have traditionally led such companies to engage in a high stakes guessing game in deciding what products to stock, or when to cut prices. On a basic level, the applications use complex algorithms to help companies build detailed business models of consumer demand.

The software is expensive. ProfitLogic, for instance, charges upward of $2 million for its products. But using pricing software, companies can apply increased scrutiny to their merchandising and inventory systems to better understand the performance of specific stores or products. Measuring data stored in their point-of-sale devices, the companies attempt to offset factors that have long caused them to guess what sort of products their customers are hungry to buy, and how much people might be willing to pay for them.

Many of the applications under the enterprise resource planning (ERP) and customer relationship management (CRM) banners address the production and supply chain-related initiatives of companies in the retail space. Products such as ProfitLogic's software, which is already used by well-known retail companies including Ann Taylor, the Gap and the U.K.'s Tesco supermarket chain, aim to track trends such as fashion styles and seasonality that those systems aren't built to follow.

For instance, retailers have traditionally pigeonholed stores into so-called clusters, where they are organized into groups based on regional locations, or the types of products they sell. Performance of each individual store is then measured via a direct comparison to other stores, and companies make decisions on which items to stock or discontinue based on the comparative statistics.

The concept may seem simple, but the world's largest retailers may control tens of thousands of individual locations, making it hard to keep tabs on fast-moving fashion trends or buying habits before customers come looking for products.

Oracle's Phillips said that manufacturing resource planning technologies of the past have armed customers with massive amounts of data, but more-powerful tools are needed to garner better conclusions from the tidal wave of information provided by those systems. "This is the thing that actually transitions resource planning from being guesswork into an art form that (retailers) can quantify and use to get the right mix of products and learn over time," he said.

You might think that a company like Oracle, with thousands of engineers and millions of dollars spent each year in research and development, might build its own pricing tools. But Scott Friend, ProfitLogic's CEO, estimated that it has taken his team of economists, mathematicians and software engineers more than 15 years to build the algorithms that lie at the heart of the company's software.

He said that companies such as the Gap, which have a tremendous volume of stores and products, are always looking for new ways to work smarter.

"Pricing-software is at the heart of how the major retailers think about computing today," said Friend. "It's not about trying to be more efficient than Wal-Mart in the supply chain, it's about competing--with better customer intimacy, understanding customer demand at the store level, and using that information to select merchandise and pricing."

ProfitLogic's software differs from other applications in that it was created specifically to measure the massive amount of variables at play in any retail company's product plans, he said, whereas CRM tools tend to work best at measuring demand for goods that have linear performance over time.

Friend said this point alone is what will drive continued consolidation in the pricing space, since he believes Oracle's rivals can't likely build their own optimization applications using the same computing logic they include in their CRM products today. The executive said Oracle's rivals may try to build competing products from scratch, but that it won't be an easy process.

"It might not take the next guy 15 years to build their models like we did," he said. "But it won't be replicated overnight either."