Why does one drugstore charge $3 for a bottle of shampoo and another charge $3.49?

        How did the grocery store decide to chop 30 cents off the price of cake mixes this week?

        They guessed.

        But a Scottsdale, Ariz., company that has attracted $16 million in venture capital is starting to change that.

KhiMetrics Inc. uses modeling to set store prices. At left is marketing director Tim Oiumet with Ken Oiumet, chief technology officer, and CEO Brent Lippman. (Gannett News Service photo) | ZOOM |

        KhiMetrics Inc. and a handful of competitors are taking the guesswork out of retail pricing with ultra-sophisticated number-crunching software. It can tell a retailer how much shampoo or cake mix consumers will buy at a particular price, and what prices will bring in the most profits.

        It is called “retail revenue management.” Airlines and hotels have been doing it for years under the name “yield management” — crunching the numbers on reservations and ticket prices or room rates to figure out the combination that maximizes profits.

        But the technology is just now moving into grocery stores, drugstores and other parts of the retail industry. Computers are now powerful enough to run complex calculations on the tens of thousands of products in stores. The tough economy, which has forced retailers to cut costs to the bone, also is making them turn to the revenue side.

        KhiMetrics executives say the software allows them to price based on company goals and scientific models of consumer behavior.

        “It's all about understanding how sensitive people are to price,” Chief Executive Officer Brent Lippman said.

        But that doesn't necessarily mean higher prices.

        “Often people think if you generate more profit, you increased prices,” KhiMetrics co-founder and Chief Technical Officer Ken Ouimet said. “But a lot of times it is by selling more.”

        KhiMetrics got its start in the mid-1990s when Mr. Ouimet saw the similarities between his graduate work in chemical engineering and his parents' comparison-shopping business in Sacramento, Calif.

        Analyzing prices the company had collected for clients, he realized the data followed physics models he'd been studying. He and his brother Tim worked four or five years perfecting the technology and got a grocery chain in Sacramento to test it.

        The KhiMetrics software looks at changes in purchase patterns, a company's “price image” and its sales and profit goals. A store's price image is critical, executives say, because the software optimizes prices according to whether a store positions itself as having “everyday low prices” or regular prices that it cuts during sales.

        KhiMetrics launched the software in September 2000.

        Executives acknowledge that it's been tough selling a new idea to an old-time industry.

        “Nobody budgeted for it, nobody understands it,” Mr. Ouimet said. “But now we're at a point where the whole market is changing.”

        The company spent last year doing pilot projects for more than a dozen retailers. KhiMetrics would set prices for 50 of a retailer's stores, the retailer would set prices for another 50 stores, and at the end of six months they'd see who did better. The KhiMetrics way added 4 percent to 5 percent to gross profits, Mr. Lippman said.

        Now they are signing those retailers to longer-term contracts and projecting KhiMetrics itself will be profitable by the fourth quarter. Typical software licenses range from $2 million to $5 million.

        The privately held company has 52 employees, including a research department with doctorates in math and physics who got crash courses in retail.

        Its client list includes Walgreens Co. of Deerfield, Ill., and Winn-Dixie Stores Inc. of Jacksonville, Fla. Big Y Foods, a 46-store chain based in Springfield, Mass., signed up last month.

        Just 9 percent of pricing professionals have adopted the technology, and an additional 28 percent are getting ready to buy it, according to a survey this spring by the Atlanta-based Professional Pricing Society. But President Eric Mitchell sees it eventually permeating the industry.

        He thinks consumers will ultimately benefit because the technology reflects what people want to pay instead of what stores think they can charge.

        “The technology is based on the thought that the customer is queen or king,” he said. “All you're doing is accumulating what the queen or king says they want.”
       

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