Variable margin pricing system5987425Abstract A variable margin pricing system and method that generates retail prices based on customer price sensitivity. Products are grouped into pools from a first pool for most price sensitive products to a last pool for least price sensitive products. A logical relationship between margins and the customer price sensitivity is determined for the products. Based on this logical relationship and each product's pool assignment, the system and method calculate each product's margin and corresponding retail price. The method is also used to generate retail price labels having retail prices based on customer price sensitivity for the products to which the labels are to be affixed or located proximate. Claims What is claimed is: Description FIELD OF THE INVENTION
TABLE 1
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M1A % = 0.55 M1C %
M1B % = 0.85 M1C %
M1D % = 1.11 M1C %
M1E % = 1.22 M1C %
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All of the above pools typically have minimum and maximum limits which set the extreme values for the variable margins of items in each pool. These limits may be used to set the boundaries of the useful range of the mathematical function, the reasonable range of allowable margins, and in certain departments to put an upper limit on the unusual cases where low end prices are sensitive. A start-up variable margin pricing system may be used with a recommended set of pool assignments for every SKU in every department. This recommended pool may be developed by a group of experienced retailers for a particular product line who, because of their experience, have a good "feel" for the price sensitivity of items in the product line. Dealers who are just starting to use the variable margin pricing system can accept these recommendations or modify them to meet their own particular needs. Start-up dealers, for example, may run their past purchase history through a set of recommended pool assignments and then tailor them to the needs of their particular market. For instance, dealers may want to look especially for SKUs that will allow more margin than the standard pool C and adjust the pool assignments accordingly. Once dealers have made any pool changes to set up their department, the dealers again may have their previous twelve months purchases, for example, run through their own specially set-up variable margin pricing system with a margin setting (pool C margin M1C) that will deliver the same gross profit as their earlier pricing system. The dealers can then make a final evaluation of a variable margin pricing system in their stores and adjust the margin up and down by changing the departmental M1C setting as they see fit. Therefore, the present invention provides for allowing the dealers a parameter (M1C) to adjust their departmental gross profits to a level that fits their situation. When the dealers adjust the parameter every retail price in every pool in the selected department moves up or down in unison, as determined by the pool interrelationships. (Pool X and pool F do not change with the adjustment of this parameter.) Variable Pricing Theory As discussed above, variable margin pricing involves determining a logical relationship between margins and customer price sensitivity. This may be accomplished, for example, by first assembling a group of experienced dealers, making a table of cost points which covers usual range of SKUs for the dealers' product lines, and then assigning retail prices to the cost points that the dealers believe fit the definition of comfortable pricing for the standard pool C non-sensitive SKUs. Table 2 contains exemplary data for cost points and "comfortable" retail prices for hardware and related products.
TABLE 2
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Cost ($) Retail Prices ($)
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0.01 0.05
0.05 0.17
0.10 0.30
0.20 0.50
0.50 1.15
1.00 2.10
5.00 8.75
10.00 16.50
50.00 70.00
100.00 130.00
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Next, based on this data, one performs "curve fitting" in order to determine a mathematical expression for a curve which would fit the relationship shown by the data in Table 2. A curve fit was found in the logarithmic family of mathematical relationships. The expression is a restatement of the typical margin equation [1]. ##EQU1## Adding a new term which reduces the margin as cost increases in order to fit the data in Table 2 produces the mathematical relationship shown in equations [2] and [3]. ##EQU2## The new denominator in equation [3] replaces the simple (1-M) of the original margin expression (equation [1]). In equation [3], K2=slope of margin adjustment. It has been found that a value of 0.14 is very good. This means that for every factor of ten increase in cost the margin decreases 14%. Note that when the cost is less than $1 (one dollar) the logarithmic term becomes negative and the retail prices are increased as costs decrease. This is a very good fit to hardware and related types of merchandise. Fitting the curve (equation [3]) to dealers' typical comfort-level prices as shown in Table 2 yields values for the equation constants as follows: M1=52% margin at $1 SKU Cost K2=0.14 These values for the parameters are not the only possible values providing a relationship between price sensitivity and margin. However, agreement has been found among dealers of hardware and related products on the comfort level prices which these parameters represent. It has also been found that the M1 setting in pool C usually ranges from about 0.5 to 0.6 for the typical departments in a hardware store. One aspect of a variable margin pricing system is a controller. An example of a controller is shown in Appendix A. This document lists all the coefficient settings necessary to control the retail prices of, for example, a hardware store's inventory. It provides dealers with a precise view of the structure of their retail pricing and access to the controls necessary to adjust retail prices according to variable margin pricing. As described above, the M1 settings of all the pools (except X or F) are usually interrelated by simple ratios driven by the setting of M1C (pool C). Thus every retail price in the entire department (not X or F) changes with M1C. This concept reduces a complicated set of interrelated values into something readily visualized and understood by dealers. For security purposes, a variable margin pricing system can be programmed such that nothing in the database can be assessed without entry through the controller, which restricts access only to authorized personnel. FIG. 3 is a graph of an example of a margin pool family for items within one particular department of a store. The vertical axis for margin percentage is located at $1.00 cost, because this cost is the reference value for pool margin assignments. If the pools are interrelated, as described above, then a dealer can adjust all prices for products in pools A-E by changing parameter M1C, which is the margin for pool C products at $1.00 cost. The graph in FIG. 3 also shows how margin increases from pools A-E as price sensitivity decreases (in the vertical direction from bottom to top), and how margin decreases within each pool as cost increases (in the horizontal direction from left to right). The "flat" portions at the ends of the graph represent minimum and maximum margins for each pool. Variable Pricing System and Method FIG. 4 is a block diagram of an apparatus for implementing a variable margin pricing system according to the principles of the present invention. The apparatus includes a computer 20. The computer 20 may be implemented with a conventional digital computer, such as a personal computer, which includes a microprocessor 21 for controlling operation of pre computer 20 and executing programs. The computer 20 also includes a random access memory 22 (RAM) and read-only memory 23 (ROM). The RAM 22 can include non-volatile memories such as a hard disk drive. The computer 20 may be interfaced to a monitor 26, such as a typical monochrome or color computer monitor. An input device 24 may be used for entering information or commands into the computer 20. The input device 24 may be implemented with, for example, a keyboard, cursor control device such as "mouse," or modem connection. The computer 20 is electrically connected to a printer 27, which is a typical computer printer for printing information onto paper or other materials such as price labels. The computer 20 may also be interfaced to a mainframe computer 25 for retrieving or storing data. FIG. 5 is a flow chart of a typical process for variable margin pricing. This process may be implemented using a software program that is stored in the computer 20, such as in ROM 23 or RAM 22, and executed by the microprocessor 21. As described above, a dealer first divides products by department (30). A store may have such a small inventory, or only one product line, such that different departments are not required. A typical store, however, benefits from dividing products by department in order to provide more precise price control using the present invention. Products or items are also categorized according to customer price sensitivity (31). This step is described above. This categorization may be accomplished by assembling a group of dealers and having them assign each product to a pool based upon their industry experience regarding customer's sensitivity to prices of particular products. Alternatively, recommended pool assignments may be provided to dealers. For example, in the case of a franchised operation, a franchiser may provide recommended pool assignments for products to the franchisees, who can then use the recommended assignments and change particular pool assignments as they see fit. Parameters for the variable margin formulas discussed above must also be determined (32). As with the pool assignments, these parameters at least for initial price determinations may be determined by dealers or, for example, provided by a franchiser or "parent" store. Individual dealers may then fine-tune the pricing by adjusting the parameters, such as the main parameter M1C for pool C margin at $1.00 cost. Once the pool assignments and parameters are determined, one may calculate retail prices. This may involve first retrieving product costs (33), which includes a cost for each of the products for use in a variable margin formula. Since some stores already have cost information stored within, for example, a mainframe computer, this step may involve accessing the mainframe computer 25 via modem and reading or downloading cost information. For instance, the mainframe 25 may store cost information for a chain of stores. Each of the stores may have a computer 20 which accesses the mainframe in order to download the cost information and calculate retail prices for products in that store according to the principles of the present invention. Therefore, an implementation of the present invention may include a plurality of computers 20 each having embedded software to calculate prices and each being interfaced to the mainframe 25. This also allows stores with existing cost information stored electronically to implement the present invention without having to redefine or re-enter cost information. Based on the cost information, retail prices are generated as determined by the formulas and principles discussed above (34). For example, the computer 20 may read the cost information, calculate retail prices based on pool assignments and a variable margin formula, and then store the generated retail prices in another file for use in pricing the products. Additional fine-tuning of the prices may be required or desired by a dealer. A dealer may desire to adjust the generated margins for particular products (37), in which case the system allows the dealer to enter a margin for any particular product (38). Finally, a dealer may desire to perform final price rounding on the generated prices so that the prices "look" more attractive to customers (39). In this case, the system performs final prices rounding rules on the generated retail prices (40). Table 3 illustrates an example of price rounding rules.
TABLE 3
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Price Range Rounding Rule
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$.00-$.25 No rounding takes place.
.26-2.50 If the last digit is less than "6" it will
be rounded to a "5". If it is "6" or higher
it will be rounded to a "9".
(e.g. $1.74 to $1.75)
2.51-9.99 The last digit will be rounded to "9".
(e.g. $3.73 to $3.79)
10.00-19.99 If the cents are between .00 and .10, $1.00
will be subtracted and the cents will be
changed to .99.
(e.g. $12.05 to $11.99)
If the cents are between .11 and .19 it will
be rounded to .19.
(e.g. $12.17 to $12.19)
If the cents are between .20 and .39 it will
be rounded to .39.
(e.g. $12.31 to $12.39)
If the cents are between .40 and .59 it will
be rounded to .59.
(e.g. $12.47 to $12.59)
If the cents are between .60 and .79 it will
be rounded to .79.
(e.g. $12.63 to $12.79)
If the cents are between .80 and .99 it will
be rounded to .99.
(e.g. $12.82 to $12.99)
20.00 on up If the cents are between .00 and .10, $1.00
will be subtracted and the cents will be
changed to .99.
(e.g. $57.07 to $56.99)
If the cents are between .11 and .29 it will
be rounded to .29.
(e.g. $59.19 to $59.29)
If the cents are between .30 and .49 it will
be rounded to .49.
(e.g. $59.32 to $59.49)
If the cents are between .50 and .69 it will
be rounded to .69.
(e.g. $59.64 to $59.69)
If the cents are between .70 and .89 it will
be rounded to .89.
(e.g. $59.75 to $59.89)
If the cents are between .90 and .99 it will
be rounded to .99.
(e.g. $59.94 to $59.99)
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After the price calculations (34, 38, 40), the system typically stores the final retail prices (41). The system can then access the stored retail prices in order to generate reports (42) for use in, for example, pricing products in the corresponding store or evaluating the prices. An example of such a report is shown in Appendix B. In addition, the system may format and print the stored retail prices onto retail price labels to be affixed to the corresponding products. The computer 20, operating under software control, formats the retail price information and prints the retail prices onto labels using the printer 27. FIG. 6A is a diagram of a generic price label or ticket 45. The price label 45 includes a retail price 46 of a product and optional other information 47, which may include, for example, a product number, store number, store name, and product pool. FIG. 6B is a diagram of an example of a retail price label 48 with price ($ 17.40) and other information, such as the pool to which the corresponding product is assigned (pool C). These retail price labels may be affixed to a product, such as with an adhesive label or a plastic filament. Since some products, for example, contain a barcode with price information to be read by a cash register, it is not always necessary to actually attach or affix the label to the product. Therefore, these retail price labels may be alternatively located proximate a product, such on a store shelf on which the product is presented for sale. FIG. 7 is a diagram of typical files within a computer system for use in implementing variable margin pricing described above. A margin maintenance file 50 stores information for use in generating retail prices, such as pool assignments, reference margin at $ 1.00 cost (such as M1C), values for parameters (such as K2) for use in a variable margin formula, and minimum and maximum margins for each pool. An example of this information and data structure is shown in the user interface of FIG. 9, described below. A margin and retail price file 51 stores cost information and generated margin and retail price information. An example of this information and data structure is shown in the report in Appendix B. The files 50 and 51 are typically electronically interrelated so that when, for example, a dealer changes a margin in file 50 the system automatically recalculates retail prices, when requested, and stores them in file 51. FIGS. 8-11 are preferred user interfaces for a system that implements the present invention in the computer 20 according to the processing described above. FIG. 8 is a diagram of a menu user interface for allowing a user to select various sub-screens for entering or viewing information. FIG. 9 is a diagram of a margin maintenance user interface for a variable margin pricing system and corresponds to menu item "10" in FIG. 8. The user interface in FIG. 9 corresponds to file 50 and stores information used in generating retail prices for each department in a store. The margin maintenance typically includes: a margin at $ 1.00 for each pool (designated as a classification code in FIG. 8) for use as a reference point; a margin change coefficient for each pool (K2 value in a variable margin formula, such as the formula described above); any additional margin ("add margin") to be added to the calculated margin; and minimum and maximum margin values for each pool. FIG. 10 is a diagram of a custom pricing retail inquiries user interface for a variable margin pricing system and corresponds to menu item "6" in FIG. 8. The user interface of FIG. 10 allows a dealer or others to view stored information such as a generated retail for a particular product along with the corresponding cost information. FIG. 11 is a diagram of a classification code maintenance user interface for a variable margin pricing system and corresponds to menu item "2" in FIG. 8. The user interface of FIG. 11 allows a dealer or others to view and enter a classification code (pool assignment) for products. For instance, as shown in the exemplary data contained in FIG. 11, item number 520-395 in store number 789-8 is assigned to pool D. In summary, the present invention involves a system and method for generating retail prices based on customer price sensitivity. This allows dealers more flexibility in pricing products and more direct control over margins and pricing in order to remain competitive and control gross profit. The margins are varied based on a logical relationship between margin and customer price sensitivity. The variable margin pricing system and method can also be used to generate preprinted labels to be affixed to or located proximate products. While the present invention has been described in connection with a preferred embodiment thereof, it will be understood that many modifications will be readily apparent to those skilled in the art, and this application is intended to cover any adaptations or variations thereof. For example, different numbers of pools, or parameters for variable margin calculation, may be used without departing from the scope of the invention. It is manifestly intended that this invention be limited only by the claims and equivalents thereof.
APPENDIX A
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VAMPS MASTER CONTROL DOCUMENT
1 #STR1##
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Department
Department
POOL
POOL A POOL B POOL C
Number
Name X M1 k2 ml mh M1 k2 ml mh M1 k2 ml mh
__________________________________________________________________________
1 Paint Sundries
0 0.325
0.075
0.10
0.40
0.502
0.14
0.15
0.60
0.590
0.14
0.20
0.80
2 Tools 0 0.297
0.075
0.10
0.40
0.459
0.14
0.15
0.60
0.540
0.14
0.20
0.80
3 Electrical
0 0.303
0.075
0.10
0.40
0.468
0.14
0.15
0.50
0.550
0.14
0.20
0.80
4 Builders
0 0.330
0.075
0.10
0.40
0.510
0.14
0.15
0.60
0.600
0.14
0.20
0.80
5 Sporting Goods
0 0.275
0.075
0.10
0.40
0.425
0.14
0.15
0.60
0.500
0.14
0.20
0.80
6 Housewares
0 0.275
0.075
0.10
0.40
0.425
0.14
0.15
0.60
0.500
0.14
0.20
0.80
7 Rural 0 0.286
0.075
0.10
0.40
0.442
0.14
0.15
0.60
0.520
0.14
0.20
0.80
8 Plumbing
0 0.319
0.075
0.10
0.40
0.493
0.14
0.15
0.60
0.580
0.14
0.20
0.80
9 Lawn & Garden
0.05
0.286
0.075
0.10
0.40
0.442
0.14
0.15
0.60
0.520
0.14
0.20
0.80
10 Automotive
0 0.303
0.075
0.10
0.40
0.468
0.14
0.15
0.60
0.550
0.14
0.20
0.80
11 Store Supplies
0 0.303
0.075
0.10
0.40
0.468
0.14
0.15
0.60
0.550
0.14
0.20
0.80
12 Paint 0 0.275
0.075
0.10
0.40
0.425
0.14
0.15
0.60
0.500
0.14
0.20
0.80
13 Toys 0 0.275
0.075
0.10
0.40
0.425
0.14
0.15
0.60
0.500
0.14
0.20
0.80
Currently
Paint Sundries
0.000
0.325
0.075
0.10
0.40
0.502
0.14
0.15
0.60
0.590
0.14
0.20
0.80
Selected
Coefficients
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Department
Department
POOL
POOL D POOL E
Number
Name X M1 k2 ml mh M1 k2 ml mh
__________________________________________________________________________
1 Paint Sundries
0 0.655
0.14
0.35
0.85
0.720
0.14
0.45
0.90
2 Tools 0 0.599
0.14
0.35
0.85
0.659
0.14
0.45
0.90
3 Electrical
0 0.611
0.14
0.35
0.85
0.671
0.14
0.45
0.90
4 Builders
0 0.666
0.14
0.35
0.80
0.732
0.14
0.45
0.90
5 Sporting Goods
0 0.555
0.14
0.35
0.85
0.610
0.14
0.45
0.90
6 Housewares
0 0.555
0.14
0.35
0.85
0.610
0.14
0.45
0.90
7 Rural 0 0.577
0.14
0.35
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Same subclass Same class Consider this |
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