Optimization of EDVP in Retail and E-Commerce

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Optimization of EDVP in Retail and E-Commerce

• Y.-H. Chen, Ph.D.
• Information Engineering / IC
• Ming-Chuan University

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Every-Day-Value-Price (EDVP)

• Utilized by US businesses in 2001.
• Increase sales by having more people visit the
  stores or web sites (increased in-store traffic)
  through the offer of good deals on popular
  products.
• Convenience of shopping at one place for the
  whole family.

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EDVP Businesses

• Super Wal-Mart,
• K-Mart (Blue-Light Merchandise),
• Target,
• Amazon,
• Tom Thumb, Kroger, Albertson,
• , and other retailers.

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EDVP Problems

• Decreased sales due to (inappropriate) EDVP
  products.
• Increased store traffic is below expectation.
• Increased store traffic does not cause sales of
  other products.
• Reduced profit of EDVP products offsets increased
  sales of other products.
• Negative profit due to low or free EDVP product
  prices.

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EDVP Problems (cont)

• Lack of knowledge about
• the magnitude of price mark down needed, and
• its quantitative impact to the sales of other
  products.

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EDVP Objective and Decisions

• Objective Maximize profit gain
• Decisions
• What products are good candidates for EDVP
  products?
• How much price mark down?
• Store traffic v.s. real demand?

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EDVP Model

• Assumptions
• EDVP v.s. non-EDVP products.
• Sufficient product supply.
• No product disposal cost.
• Increased sales of non-EDVP products is
  independent with the demand distribution of EDVP
  products.

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EDVP Model (cont)
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EDVP Model (cont)

• where

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EDVP Optimization
where
and
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EDVP Optimization Chart
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EDVP Business Strategy 1 Price Mark Down
Decision

1. If the computed optimal price mark down is not
   feasible, we should not consider price mark down
   or we should give away the EDVP product for free
   (Corollary 1).

No price mark down!
Mark down price!
Give away for free!
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EDVP Business Strategy 2Product Selection

1. We can improve the optimal profit gain further by
   using different products in our problem
   (Corollary 2 and Lemma 2.1).

and
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Business Strategy 3Product Selection Details

• If we consider different products to improve the
  optimal profit gain, we can use any combination
  of the following methods
• Replace any or both products with the ones having
  higher unit profit (Corollaries 3 and 4).
• Replace any or both products with higher
  correlation between their demand quantities
  (Corollary 5).
• Use a highly elastic product as our EDVP product
  (Corollary 6).

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Business Strategy 3Product Selection Details
(cont)
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Grocery Chain Example

• Watermelon unit cost 1.00, unit price 5.99,
  unit profit 4.99.
• Beef (per pound) unit cost 2.00, unit price
  8.99, unit profit, 6.99.
• Historical watermelon demand 2000 units.
• Traffic and demand ratio 0.80.

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Grocery Chain Example (cont)
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Grocery Chain Example (cont)

• Mark down watermelon unit price by 3.29, i.e.,
  unit price becomes 5.99-3.29 2.70.
• Watermelon sales is increased by 1645.
• Maximal net profit gain from the price mark down
  is 1353.84 for a weekend.