Reducing Perishable Food Waste through Innovative Marketing Approach

Jaekwon Chung and Dong Li

Management School, University of Liverpool, UK
Research Background and objective
Numerous studies have reported on optimal and dynamic pricing models for perishable products designed to maximize the profitability of retailers. In addition,
the emergence of advanced traceability systems provides great opportunities for more effective management of perishable foods shelf-life through improved
transparency and dynamic pricing approaches which match price changes with more accurate food shelf-life variations. However, the existing researches on
perishable food pricing have particularly focused on the inventory management and lost of sales, etc. Customers reaction to dynamic pricing approaches are
rarely modelled in the retail pricing research [1][2][3][4][5].
Therefore. this study attempts to develop and validate dynamic pricing approaches for perishable foods through establishing a simulation model based on the
present retail business processes identified from the interviews with retailers and consumer purchasing patterns identified from the survey with consumers.
A valuevalue-based customer need driven pricing strategy for perishable foods

Notations and explanations:

Ds (Desired) sum of gradually changed mark down rates over the product shelf-life
n The length of pre-defined shelf-life
nt Remaining shelf-life on day t
Dt Discount rate on day t

.for t= 1, 2, 3, ..n
.

This approach can be applied either based on the pre-defined remaining shelf-life (hereafter, this is referred to as dynamic pricing approach 1 or DP 1), or on
a more accurately identified shelf-life determined by advanced traceability systems (hereafter, this is referred to as dynamic pricing approach 2or DP 2) as
proposed by prior dynamic pricing models for perishable foods
Data from interviews with retailers [1]

Consumer purchasing patterns [1]

Present pricing strategy: on average, the retail stores reduce price of

perishables by 30% when 30% of the products shelf-life remains;

Through the surveys, we determined the percentage of each purchasing with

dynamic pricing approaches and with the present pricing approach as follows.

Profit margin: this varies depending on product types and, on average, retail
stores aim to set an initial profit margin percentage between 20 ~ 40% for
selling a perishable food (before discounting).
Operations management: on average, the target quantity of perishables on the
shelf is 30 units, and replenishment is completed when the quantity is less than
10 units. Products in the warehouse that have fewer days remaining before their
expiry dates are placed first on the shelf. The retail stores keep more products in
stock of the perishables that have a relatively longer shelf-life.
Disposal rate: On average, 2% of perishable foods remain unsold and are
discarded. This amount can sometimes be up to 10%.
The Simulation Model
Warehouse

Present pricing approach

Dynamic pricing approach 1

Dynamic pricing approach 2

Purchasing patterns
1.Freshness preferred
purchase
2. Price preferred purchase

% Purchasing patterns
% Purchasing patterns
1. Freshness preferred
1. Freshness preferred
73
21
purchase
purchase
10 2. Price preferred purchase 9 2. Price preferred purchase

3. Random purchase

17 3. Random purchase
4. Need-based purchase

2
76

5 3. Random purchase
65 4. Need-based purchase

7
15

a Freshness

preferred purchase Check the expiry date (remaining shelf-life) and buy the
most expensive products with the longest days left until expiry; b Price preferred purchase
Buy the cheapest products; c Random purchase Do not care about the system, and
choose randomly; d Need-based purchase Buy the products that have the closest
remaining shelf-life to the days needed for consumption with benefits from making
economic trade-offs between price and freshness.

The results of simulation tests

Shelf

The summarized results of simulation tests are presented in Figures below.

Percentage

Pricing rule
Apply Present Pricing
Rule or Dynamic pricing
Rule

Purchase

1.4
Consumer

Difference in annual disposal

rate between present pricing
approach and DP1

1.2
1
0.8
0.6

Sold

Unsold

Difference in annual disposal

rate between present pricing
approach and DP2

0.4
0.2
0

Profit

The simulation is established based on the present business process and

consumer purchasing pattern identified from interviews and surveys. The
summarized core input variables that need to be entered at the start of each
simulation run are indicated in Table below, and dynamic pricing rule by
applying the same Ds as the present pricing approach is also indicated in Table
below.
Input Variables
1

Given target stock level, Shortest shelf-life

products out first.

Given maximum level (30 packs) of products

on shelf and refill at refill-point (10 packs),
disposed after expiry date.

Given initial selling price ($10), purchasing

cost ($7); mark-down by given rule.

Shelf-life (3 to 15 days)

Number of product sold a year (18,000)

Percentage of each consumer purchasing

pattern set by the data from the survey

Shelf-life

12

15

10
*
*
*
*
*
*
*
30

4
12
20
*
*
*
*
*
60

2.5
7.5
12.5
17.5
*
*
*
*
90

1.8
5.5
9.1
12.7
16.4
20
*
*
120

1.4
4.3
7.1
10.0
12.9
15.7
18.6
*
150

12

15

Shelf-life

Annual profit
28000

Profit with 5% increase in

Ds

27000

Profit with 10% increase in

Ds

26000
25000

Profit with 15% increase in

Ds

24000

Profit with 20% increase in

Ds

23000
22000

Days passing
1
3
5
7
9
11
13
15
Ds :

Reference Value
8
% Increase in demand

As seen in Figures, dynamic pricing approaches can reduce the number of

unsold product compared to that with the present pricing approach. And also
higher sum of discount rate with a dynamic pricing approach can be
compensated with the augmentation with demand. (reference value refers to
the annual profit with the same sum of discount rate as the present pricing
approach; the analysis is made by using the product type with 14 days of
shelf-life).

Key References
[1] Chung, J. and Li, D (2012), The prospective impact of a multi-period pricing strategy on consumer perceptions for perishable foods. British Food Journal (in Press). [2] Y.H. Chun, Optimal pricing and
ordering policies for perishable commodities, European Journal of Operational Research, vol.144, no.1, pp.68-82, 2003.[3] W. Elmaghraby and P. Keskinocak, Dynamic pricing in the presence of
inventory considerations: Research overview, current practices, and future directions, Management Science vol.49, no.10, pp.1287-1309, 2003. [4] D. Li, O. Tang, C. OBrien, and X. Wang, Improve
food retail supply chain operations with dynamic pricing and product tracing, International Journal of Services Operations and Informatics, vol.1, no.4, pp.347-362, 2006. [5] X. Liu, O. Tang and P. Huang,
Dynamic pricing and ordering decision for the perishable food of the supermarket using RFID technology, Asian Pacific Journal of Marketing vol.20, no.1, pp.7-22, 2008.