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Analytics for an Online Retailer: Demand Forecasting and Price Optimization

Author

Listed:
  • Kris Johnson Ferreira

    (Technology and Operations Management Unit, Harvard Business School, Boston, Massachusetts 02163)

  • Bin Hong Alex Lee

    (Engineering Systems Division, Massachusetts Institute of Technology, Cambridge, Massachusetts 02193)

  • David Simchi-Levi

    (Engineering Systems Division, Department of Civil and Environmental Engineering, Institute for Data, Systems, and Society, and the Operations Research Center, Massachusetts Institute of Technology, Cambridge, Massachusetts 02193)

Abstract

We present our work with an online retailer, Rue La La, as an example of how a retailer can use its wealth of data to optimize pricing decisions on a daily basis. Rue La La is in the online fashion sample sales industry, where they offer extremely limited-time discounts on designer apparel and accessories. One of the retailer’s main challenges is pricing and predicting demand for products that it has never sold before, which account for the majority of sales and revenue. To tackle this challenge, we use machine learning techniques to estimate historical lost sales and predict future demand of new products. The nonparametric structure of our demand prediction model, along with the dependence of a product’s demand on the price of competing products, pose new challenges on translating the demand forecasts into a pricing policy. We develop an algorithm to efficiently solve the subsequent multiproduct price optimization that incorporates reference price effects, and we create and implement this algorithm into a pricing decision support tool for Rue La La’s daily use. We conduct a field experiment and find that sales does not decrease because of implementing tool recommended price increases for medium and high price point products. Finally, we estimate an increase in revenue of the test group by approximately 9.7% with an associated 90% confidence interval of [2.3%, 17.8%].

Suggested Citation

  • Kris Johnson Ferreira & Bin Hong Alex Lee & David Simchi-Levi, 2016. "Analytics for an Online Retailer: Demand Forecasting and Price Optimization," Manufacturing & Service Operations Management, INFORMS, vol. 18(1), pages 69-88, February.
    • Handle: RePEc:inm:ormsom:v:18:y:2016:i:1:p:69-88
    DOI: 10.1287/msom.2015.0561
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    References listed on IDEAS

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