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Can Gap’s Price Optimization Strategy Improve Its Profitability? | Forbes


As Gap Inc struggles to improve sales, it faces tough competition from fast fashion retailers. The company is now using a cloud based optimization system to localize the pricing of inventory in its network of retail stores. The new strategy will enable Gap to optimize price in several ways, such as identifying the location of the closest distribution centers to stores so as to minimize cost. It also offers localized promotion polices and has an elastic pricing solution as well. Gap is facing a continuous decline in revenues and its stock price has been on a down slide after the April sales results were released. We recently lowered our price estimate for the company by 30% on the weak revenues. While a price optimization strategy will work to the advantage of the company, it needs to work on its products to make them more appealing to consumers, so as to improve sales and compete with fast fashion retailers.

Using Data For Complex Modelling To Optimize Pricing

Gap is trying to use its extensive data spread across various databases to solve a computationally intensive-problem using a linear optimization tool called Gurobi. Through this technology, Gap plans to reduce the cost of moving inventory to its thousands of stores from distribution centers by finding the most cost effective match. Other areas where this optimization technique can help include managing promotions and clearing slow moving stock. If a particular inventory item is not selling in one or more locations, Gap can now price the product lower in this region as opposed to giving a flat discount on it in all locations. Regional and seasonal factors (i.e., summertime short sleeve products) can also be considered in the model to optimize the price for each location. As things are now, Gap engages in huge clearance sales when facing issues of slow moving inventory, often generating high losses. The new optimization strategy can address this issue by localizing the discounts, hence improving profitability. Another challenge faced by Gap is the inability to get fresh inventory to stores more often which can be solved by a shorter production cycle. However, by reducing transportation cost of moving inventory from distribution centers to stores, Gap can transport inventory more frequently at a lower cost. Including a shorter production cycle with faster turns, this optimization can have a positive impact on profitability.

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Can Gap’s Price Optimization Strategy Improve Its Profitability? – Forbes.