Setting inventory and quantity based price strategy to maximize profit

Abstract

In retail industry, dynamic pricing is a pricing strategy used by e-commerce and retail businesses using real-time data to calculate supply and demand factors to set prices for goods and services. Dynamic pricing strategy has been widely and successfully used on ecommerce platforms in recent years, particularly on double days of the month and year, there are many sale programs like buy one get one free, or big discount prices, which help to drive ten times more sales than usual. However, in traditional retail stores, the dynamic pricing strategy has not been implemented extensively and thoroughly. As a result, the main objective of this paper is to create a dynamic price strategy - a quantity-based pricing strategy - and an optimal inventory policy to maximize expected profit during peak demand periods or high stock situations by adjusting prices to boost sales, attract customers to specific products, and sustaining inventory levels. The information in this article is based on historical data from the LOOK KOOL stores - owned by the largest' retail - Central Retail VietNam. We define the conditions that lead to optimal inventory control and sales strategies by answering 3 questions at the beginning of each import period: What is the point of replenishment? When using the single unit price selling? And when setting a discounted quantity-based price strategy? (Or a combination of the two sales methods). Surprisingly, these conditions can be formed under a utility-based demand structure by a simple consistency expectation that has been used in the concept of selling and mechanism concept. According to our numerical analysis, swap from uniform price to price which set up based on quantity can result in significant profit increases, especially with the products having low ordering costs but high gross margin.