Every retailer is seeking the shortest way to the heart of customers. “Everything we do is anchored around ‘What would our customers think of it?’” according to Phil Jordan, Sainsbury’s CIO. Rewarding customer experience starts with setting the right prices. The reason for this is that customers care about the price of a product the most.
Knowing this, the first thing retailers should do is to optimize their pricing. Advanced companies like Amazon and Walmart have been using next-gen technology like AI in pricing for years. In fact, 35% of Amazon’s revenue is generated by AI-enabled price recommendations.
Commenting on the potential of AI for retail, 7Eleven’s VP of digital customer and store experience, Tarang Sethia, stated: “We think AI should be like electricity, it powers everything so we can serve the customers in a way they’d like to be served and to take the friction away.”
Meanwhile, most retailers stick to traditional intuition-based pricing and stagnate. Despite the fact that recent market tests show a double-digit profit uplift thanks to AI-based price optimization.
What sets AI-led pricing apart from intuition-based pricing?
Normally, pricing analysts consider up to four pricing and non-pricing factors when crafting prices. Also, they mostly base their pricing decisions on their intuition. But today it is not enough anymore. To succeed, retailers, just like the rest of the world, need to switch to data-driven pricing.
Obviously, retail businesses aspire to set optimal prices, or such prices which:
- do not irritate shoppers;
- boost margins;
- consider the demand elasticity of every item.
But reaching the pricing optimum is still a challenge. It requires huge computational and analytical power. Especially, when it comes to re-pricing thousands of products — which is the case for a great number of retailers. The situation gets even tenser as pricing analysts are always pressured time-wise: the market is changing rapidly, while the price has to remain optimal at any given moment.
Therefore, the amount of data coupled with the high speed of decision-making make data-driven pricing impossible for pricing analysts. Unless, they are enhanced with the right technology like AI.
“Retailers integrating AI technologies are growing 30% faster with 50% higher profit margins,”
Richard Potter, Peak’s CEO, stated at Wired.Smarter. Artificial intelligence allows pricing analysts to do the following:
- go through billions of data points in no time;
- take into account dozens of parameters (in contrast to habitual four factors);
- browse through millions of pricing scenarios and choose the most beneficial one;
- make data-driven and accurate pricing decisions with the necessary speed.
In a nutshell, retailers give AI all the necessary data, “tell” it what they want to achieve (to boost revenue while maintaining margin, to sell stock in time while keeping margin or launch profitable promos), set restrictions (to maintain margin at a certain level) and wait for the technology to show the optimal way to their goals.
Ultimately, retailers are fighting fiercely for customers. The price of a product is a hook which they can successfully use “to catch” their buyers. AI is here to help retailers navigate the waters of shoppers’ loyalty and make their prices irresistible.
