Applied Non-Linear Programming

Retail Pricing Decision

Using Non-Linear Optimization

Presentation by Achal Gupta

• Pricing is a critical aspect of any business strategy that affects both profit and customer perception.
• Setting prices too high may deter potential customers, while setting them too low may not cover costs or generate enough
revenue.

• Finding the right balance between price and value is essential for sustainable profitability and
positive customer perception.
• Factors such as market demand, competition, & cost structure, must be considered to align pricing strategy with business
objectives.

IMPORTANCE OF PRICING DECISION

Problem Statement
• Retail firms operate in a very volatile environment
• Need to constantly update prices to keep up with the market
• Demand elasticity changes
• Inflation affects costs
• Competitors react to changes in our prices
• Firms have a diverse portfolio with 1000s of SKUs and need to optimize the complete product portfolio together

NEED A DYNAMIC PRICING MODEL

Solution
A pricing model that optimizes the prices of all SKUs together to
maximize profit, taking into account the price sensitivity, cost of each SKU,
price range, and average price of the product portfolio.

➢ The model must integrate Mathematical Modelling with Managers'

Intuition.
THE MODEL
Objective : To find optimal prices of all SKUs such that profit is maximized

Constraints :
➢ Weighted Average Price of the Product Portfolio
➢ Allowed Price Range
➢ Maximum Increase allowed in prices

Parameters
• Pi = Price of ith SKU (or the current prices)
• Qi = Base Quantity of ith SKU (or the current demand)
• Maximum(Mi) & Minimum(mi) Price of the SKU
• Ei = Elasticity of demand
• Ci = Cost of making ith SKU
• Δi = Max Price Change for each SKU
• NPi = Optimized Prices of each SKU
• NQi = Predicted Demand based on the new prices
Mathematical Modeling
Maximise :

Subject To :
METHOD : Reduced Gradient Method
• The reduced gradient method is an optimization algorithm for linear programming
problems.
• It iteratively moves towards the optimal solution by taking a small step in the direction of
steepest descent.
• At each iteration, the algorithm computes a reduced cost vector that indicates the
direction of steepest descent.
• The algorithm continues until a stopping criterion is met, such as the objective function
value converging to a certain threshold or the maximum number of iterations is reached.
 Optimization: Compute the gradient
of the objective function and use it to
Feasibility: Check the solution for
iteratively refine the solution. At each
Initialization: Choose an initial guess feasibility. If the constraints are not
iteration, the GRG method computes
for the optimal solution. satisfied, adjust the solution and return
the reduced gradient in a similar way
to step 2.
to the reduced gradient method for
linear programming problems.

Termination: If the convergence

Convergence: Check the solution for
criterion is met, the algorithm
convergence. If the convergence
terminates and returns the optimal
criterion is not met, return to step 2.
solution.
EXCEL MODEL