Promotion Optimization in Retail

This chapter presents some recent developments in retail promotions. We first discuss the different types of promotion used in retail, and then survey the related literature. We next formulate the promotion optimization problem for multiple items. This formulation is directly motivated from practice, holds for general demand models, and can incorporate the relevant business rules. We discuss how this formulation captures important economic factors in the context of retail. We then present an efficient approximate solution approach by using a discrete linearization method that allows the retailer to solve large-scale instances within seconds. We next report a beginning-to-end application of the entire process of optimizing retail promotions. We divide the process in five steps that the retailer needs to follow; from collecting and aggregating the data to computing future promotion decisions. Finally, we discuss the potential impact of using data analytics and optimization for retail promotions. We convey that in our tested examples (calibrated with real data), using the promotions suggested by our model can yield a 2-9% profit improvement.