The next few years are going to be a time of massive growth for online retail, driven by customers’ ability to easily find which store has the lowest price for any given item. The problem, according to Guru Hariharan: Most retailers aren’t prepared for this new world. “There’s going to be a gun fight happening, but a lot of big retailers still only have knives,” says the founder of analytics and pricing specialist Boomerang Commerce.
Hariharan speaks from experience. He spent nearly six years in engineering and business management roles at Amazon, where he grew to appreciate the power of analytics for building and scaling e-commerce businesses. He also saw how Amazon used pricing as a key lever to maximize sales, profits or whatever model the company chose to focus on. When Hariharan left, seeing the gap between Amazon’s tools and those of other retailers—even those of big brands—was “mind-boggling,” he says.
Sunnyvale, Calif.-based Boomerang is looking to bridge that gap with its main software service, Dynamic Price Optimizer. The service starts by analyzing pricing data from a retail client and its competitors. But the secret sauce is its proprietary algorithms, which incorporate sophisticated game theory and portfolio theory models, filtering the data for almost any variable or desired outcome. Boomerang uses A/B test modeling to simulate sales outcomes of various price strategies for a client’s products. It can fine-tune a selection by analyzing the most profitable or highest-volume SKUs in a segment, even those not carried by the client retailer.
Sucharita Mulpuru-Kodali, a Forrester Research vice president and principal analyst, believes Boomerang is on to something. “Historically, retail pricing was a rudimentary cost-plus model,” she says. “There was very little science to it. The fact that these guys are looking at price elasticity of demand, these are new concepts in retail.”
Scott Jacobson at Madrona Venture Group in Seattle was also impressed by that flexibility. Jacobson invested in Boomerang because the company’s software “isn’t just about automatically finding the cheapest price,” he says. “They’re looking at elasticity for longer-tail items, places where you can raise prices when it makes sense, and use that to offset the lower margins you need on fast-moving items.”
In other words, a Boomerang retail client who’s being undercut by Amazon can determine other areas it can raise prices in order to compete.
Boomerang, which went live in January, already counts as customers Staples and RadioShack: old-school retailers that have been threatened by Amazon and are able to pay Boomerang’s seven-figure annual fees. Hariharan claims that most clients are seeing, on average, a 15 percent increase in revenue and 10 percent profit gains.
In July Boomerang announced investments of $8.5 million from Madrona and Trinity Ventures. The money will be used to scale up the business, with a focus on R&D and customer success.
With so many of today’s retail transactions influenced by e-commerce—some say the figure is as high as 80 percent—Hariharan wants to make sure his clients have plenty of firepower. “It’s a once-in-a-century, or even two centuries, phenomenon,” he says of retail’s radically changing landscape. “When we show the product, people say, ‘Holy cow, I need that today.’”