(FORTUNE Magazine) – What was the must-have item this past holiday season?

For more than a dozen big retailers--including Bloomingdale's, Ann Taylor, Gap, and Home Depot--it was software from a technology company called ProfitLogic that helped them gauge when, where, and how much to slash prices.

ProfitLogic, a five-year-old firm based in Cambridge, Mass., is one of several tech companies aiming at the new retail sweet spot: markdowns. Sale-priced items have ballooned from 8% of U.S. retail sales in 1971 to as high as 78% in some sectors today, according to the National Retail Federation and STS Market Research. In part inspired by Wal-Mart, over the past few years chains have realized there's a huge benefit not just to collecting sales data (which they've done for years) but also to spending money to mine them. In retail, "science and technology are finally bearing on the equation," says Robert Buchanan, a retail analyst with A.G. Edwards. "How do you get the same old customers to buy the same old stuff from the same old stores?" asks Scott Friend, ProfitLogic's co-founder. "The answer is finding new ways to exploit information they have about merchandise, stores, and customers."

ProfitLogic's software (developed by programmers and a team of 16 Ph.D.s) kicks in when an item--say, a green sweater--hits shelves. Based on current and historical sales, ProfitLogic determines how fast the sweaters are selling, and alerts employees when it's time to slap on a 10%, 20%, or 30% discount. At Gap, for instance, merchandisers check the web-based system before telling stores to cut prices.

"We're helping merchants understand what their customers want to buy, when they want to buy it, and at what price," says Friend of the software, which can cost a few million dollars a year. He says several of the companies that used the software for the second time this holiday season are improving their inventory (by ordering fewer items that are consistently on sale), and as a result have ended up marking fewer items down.

But even Friend knows that style mavens should at times let instinct trump software. "If you look at the way we dress around here, you'll realize we don't have a lot of fashion sense," he admits. --Julie Schlosser