Our recent post looked at a Corelle dish set, sold by Amazon, whose price changed 17 times over the summer. The dish set is on the move again, as its price increased from $52.99 to $67.99 in early November. Retailers who want to compete and beat Amazon find themselves playing a frustrating game of pricing Whack-a-Mole. Every time they adjust their price to keep pace, Amazon moves the target and changes the price again.
While we’ve focused on the Corelle dish set, this isn’t a challenge affecting specific items or product lines. Forbes reported back in 2014 that Amazon expected to change prices on 80 million items in a single day during the holiday season, and last year Business Insider reported that the online retailer makes 2.5 million price changes every day. Retailers who want to win need to get ahead of Amazon.
Moving to Artificial Intelligence Pricing Engines
Retailers’ best chance to beat Amazon comes from a widely hyped but seldom understood technology – artificial intelligence (AI). AI is technology that begins by following rules and algorithms, but learns from its experience to make better decisions. For instance, AI can analyze consumer behavior patterns, and make decisions in real time based on real-world behavior.
Today’s leading dynamic pricing engines include AI elements, as well as rules that are generated by pricing managers to help keep the system in check. For example, a rule might require all prices to stay above cost, which would prevent the AI engine from selling merchandise that wholesales for $7 below that price.
Pricing managers who are at the beginning stages of dynamic pricing don’t know what to expect from their AI system. Rather than letting the system calculate ideal price points, they inundate the system with rules, and require their authorization before a price can be published. The result is a dynamic pricing engine that applies pricing strategy across all lines of business, and offers benefits to the team, but isn’t operating at full strength.
Trusting Artificial Intelligence Engines
For retailers to fully enjoy the benefits – and higher profits – promised by artificial intelligence and dynamic pricing engines, they need to cede more control to the AI engine. Creating a baseline of rules is important. These rules help define pricing strategy and ensure that an AI engine doesn’t give products away in an attempt to undersell the competition.
However, overloading the system with rules limits its ability to make pricing decisions based on competitor pricing and consumer behavior. Ideally pricing managers should follow the 80-20 rule, where 80% of pricing decisions comes from the AI engine, and 20% comes from the pricing manager’s rules. Of course, there may be times when AI-pricing decisions need to be overruled by pricing managers, but for the most part, fully embracing an AI-powered dynamic pricing engine pays off with higher profits.