Which Price is Right?

It is, in fact, the very complexity of the economy that sends people out into the stores every month. The goal of the CPI is to measure an unchanging (or at least slowly evolving) basket of goods -- so that when Whittington plunges into the women's coats this season, she's got a detailed description of the four coats she's seeking. "My friends are very envious, because I get to go 'shopping' for a living," she says. "But it's not shopping, it's pricing." Still, Whittington says she spends so much time in stores, her friends call her "the queen of the deals."

As for the CPI itself, what's the price of that statistic? In an annual economy of $10.2 trillion, measuring the CPI costs $50 million -- 18 cents a year for each U.S. consumer.

THE SMART WAY TO LOWER PRICES: DISCOUNT LESS, BUT DISCOUNT SOONER

According to a recent study, 63% of noncouture clothing sold in the United States in 2002 was on sale. One way or another, if you're in apparel, managing markdowns matters. Over the years, clothing retailers have gone from being local shops to national chains, and buyers often haven't visited the stores that they are buying for. And even though the buyers have computers on their desks, the buying and pricing process has remained remarkably unchanged in half a century.

"Most retail companies still do a lot of things manually," says Steven Schwartz, senior vice president of planning and allocation at the Casual Male Retail Group, a chain of 475 clothing stores. "Our buyers and planners got reports on sales and inventory weekly," says Schwartz. "And they evaluated those reports, looking for what was selling, what to discount, and deciding the markdown. But they were going through paper 12 inches thick. We took a markdown. If it worked, great. If it didn't work, we took another markdown."

A couple of years ago, Schwartz began to look for a better way, and he found a half-dozen companies offering software to automate the markdown process. It works somewhat like airline-pricing software: The computers absorb several years' worth of data, look at what's in stores and how it's selling, and spit out recommendations for prices on specific clothing items. Casual Male picked ProfitLogic, a company based in Cambridge, Massachusetts that is also working with the Home Depot, JC Penney, and Old Navy. During the first year, Casual Male did a test across six departments in all of its stores. Schwartz's buyers would tell the ProfitLogic software what inventory they wanted to move, what the price was, and, most importantly, when Casual Male wanted to be sold-out (or when the chain wanted to have a certain amount left to be sold at its outlet chain).

ProfitLogic's system not only gave guidance on what to discount, and by how much, it also allowed Casual Male's buyers to ask their own questions, like, "What happens if we mark down 10% instead of 20%?"

The software inspired one basic change in the Casual Male markdown world: Discount less, but discount a lot sooner. "Merchants tend to get emotionally committed to what they buy," says David Boyce, ProfitLogic's vice president of marketing. "Buyers pick styles, colors. In general, they get it right, but once in a while, they don't. They always say, 'Just one more week! It will sell!' "

At Casual Male, the results were immediate. "Sell throughs" -- selling all of something -- "were much faster, much sooner," says Schwartz. The clothing was still on sale -- but not as deeply discounted as it would have been a month later in the season. Schwartz is protective about the exact improvement in profitability. But in June 2002, the software was rolled out for all items at all stores -- after Casual Male upgraded its national point-of-sale system.

Saks, with $6.5 billion in sales, is using similar software designed by a ProfitLogic competitor, Spotlight Solutions. After a test done during Christmas 2001, Saks rolled out the software widely this past Christmas. Like at Casual Male, the system is recommending smaller markdowns, but sooner. "What has surprised me," says Bill Franks, CIO of Saks, "is the accuracy of the software's algorithm predicting sales if we move the price. It is uncanny how accurate the software is."

Franks thinks that as the software becomes commonplace, it could have an unintended effect: that of lowering list prices. "What we've had to do up to now is overprice things at the beginning, to compensate for underpricing at the end of the season," he explains. "Ultimately, everything may be a little cheaper, because we won't have to absorb the cost of those deep markdowns at the end."