Inside Pricing’s Black Box

If we asked you to close your eyes and picture the person at the head of the company that is giving small- and medium-sized businesses the kind of data tools Amazon uses to manage its commerce platform — from inventory management, to predictive analytics, to dynamic pricing — we’re going to guess that you didn’t picture a guy who once upon a time set up shop in his garage to make organic T-shirts.

But as MPD CEO Karen Webster learned in a recent podcast interview with Stitch Labs CEO Brandon Levey, necessity turns out to really be the mother of invention – just about in any place.

“I had two very small businesses,” Levey told Webster about his entry into the world of retail tech entrepreneurship. “I had a sustainable clothing business where I would screen print shirts in my garage at night after work and then go to street fairs and trunk shows to sell them.

“Then a few years later, I met a guy on an airplane on Christmas Eve in 2007, and we started a small local accessories business for the iPhone and iPad touch. We actually sold 100,000 of these things to different countries throughout the world.”

Which required a way to methodically track orders and inventory.

Levey’s tech-savvy background prompted him to develop his own software program to manage inventory and orders. But the “aha” moment came some months later at a Las Vegas trade show when he realized that not everyone around him was quite so technologically proficient.

“I saw the guy at the booth next to me take a $10,000 order on carbon copy paper and stick it in a manila folder, and realized that was just very common,” Levey noted.

For no other reason than because the tools were not there yet. As a result, the small- and medium-sized enterprises in the field with him were sort of shoehorning their inventory management programs into their accounting software package, a solution that time and time again proved to be a dreadfully imprecise tool for the problem. And Levey realized the world needed better software more than they needed his T-shirts — and the idea of Stitch Labs was born.

“Stitch at our core is an inventory management solution, but the bigger picture of what we are trying to build is a commerce management platform,” Levey told Webster.

And that bigger vision, Levey says, is one where their merchant partners are getting a rich set of data and concurrent recommendations for what to do with it by working with Stitch.

“We integrate with every way that SMBs sell. So if they are selling a T-shirt on Amazon and eBay and Shopify all at once, you’ll have one central place where the stock quantities are moving back and forth. For us, we can look and see not just how much of an item they will sell, but where they are going to sell the item and what their margins are going to be on each channel. This helps you predict both what the margins are going to be and to predict the right channel for the business.”

Or channels, because the data Stitch sees suggests that most merchants’ efforts are most improved by diversifying their presence across channels. For example, a recent company survey of 700 million retail transactions indicated that e-tailers who take up residence in a marketplace (as opposed to merely having a shopping cart on their own site) can see big improvements to their sales figures.

We can say with a high degree of statistical confidence that if you expand from a shopping cart to selling on both a shopping cart and a marketplace, sales can be improved by up to 190 percent,” Levey noted.”

However, that multichannel approach requires a great ability to actually keep track of and benefit from all of that expanded presence. That’s one of the areas that Stitch is tuned into.

“We provide more in-depth reporting based on attributes of how SMBs sell their goods. Instead of saying this particular shirt is performing a certain way, we can get a lot more granular and say on this channel merchants sell a lot of the blue shirt, but over here they can sell more of the red ones.”

And, more interestingly for merchants, Levey said, Stitch also helps them picture how much they are going to sell and where those sales are going to happen.

“We have some simple algorithms and some more sophisticated algorithms so we have multiple ways of looking at the data. And as it is coming in, we get a look into the future and can say, ‘Over the next four weeks or eight weeks, a particular business is going to sell about this much of the item.’”

And because that predictive software is connected to the order management system that is at the core of Stitch’s offering, the system also makes it easy to move inventory in anticipation of those predictions.

Just like the systems in place at big players like Amazon.

“When you are a small business doing 5K, 20K or even 100K orders a month, you don’t have that level of sophistication,” Levey remarked. “It is one thing to say a customer will want something in the future; it’s another thing entirely to say you actually need to have that item in the future so that people can purchase it and you don’t lose a sale for lack of inventory at the right time.”

That’s one part of the Amazon “magic” that Stitch is pursuing with its new dynamic pricing offerings for businesses. The other is how to price inventory so that it moves, and is priced for the channel it is moving through.

“There are a lot of tools out there that do a lot of dynamic pricing calculations that are keyed to what things are selling for on Amazon,” Levey noted. “That can cause prices to start actually looking illogical – you sell a shirt that is $47 on Amazon, but $50 on your site and $52 on eBay. What Stitch is really focused on is how you can do the dynamic pricing everywhere and how you can be holistically competitive no matter where you sell that [product].”

And, he said, part of that broad-based look means accepting that price — even a low price — isn’t everything. For example, there is a difference for many clothing retailers in what they can charge in relation to how sizing is written on their label. Surprising though it may be, sizing with a letter – “L,” “M” or “S” is much more effective for sales than writing out the words.

“Our data suggests that you can have a 5 to 30 percent lift just by using the letter,” Levey noted. “We can’t definitively say why, but if you think about it consumers really relate to the good they are buying.  Consumers don’t look at a shirt and say ‘the shirt is a large.’ Instead, they say ‘I am a large.’ So nobody likes to think of themselves as a double extra large or even a medium. But people are fine with being an M.”

Makes sense. People will pay more if they feel the clothing’s label is not judging them.

And those are the kinds of insights that retailers are unlikely to unearth in their data, mostly because their job isn’t to gather this kind of data.

“By automating what we do [it] gives people a lot more time back in their day to think about how to strategically sell their goods,” Levey said. “What we’re doing today is just scratching the surface. There are a lot of pricing automation tools and repricing tools that we will be releasing and partnering with. And in the longer term, we want retailers to be able to use our surface to really tailor all of their decisions — from inventory, to location, to marketing channels — and to do it in a way that is seamless and easy for retailers.”

And while it can seem like a big goal, Stitch Labs started as an idea at a trade show. Today they are approaching over 10,000 retail partners.

So next time someone tells you they are starting a screen printing business in their garage, congratulate them. It just might be the beginning of an amazing new business.