As Inflation Rages On, Retailers Turn to AI and Dynamic Pricing

GUEST BLOG: In this contributed blog post, Matt Pavich, senior director of retail innovation, Revionics, talks about how AI-driven dynamic pricing decisions can assist in a retailer’s ability to combat the adverse effects of inflation and other market variables.

Rising prices – as a result of inflation and other factors – are impossible to ignore. In fact, recent findings from Kantar suggest that grocery prices rose at their fastest rate in more than eight years in February.

With all the intense scrutiny on pricing lately, a widely debated topic in retail has resurfaced: How much of retailers’ pricing strategies should be automated? How much of retailers’ pricing strategies should be decided by algorithms? And more specifically, are retailers – and consumers – ready for more widespread adoption of dynamic pricing?

As savvy and sophisticated as it sounds, dynamic pricing is not a new concept. In the travel industry, dynamic pricing powers everything from the cost of plane tickets and hotel rooms to rental cars and ride-sharing.

And lest we forget, Amazon has long been a devotee of dynamic pricing. It’s not uncommon for the e-commerce giant to change prices on millions of items throughout the day.

With Amazon looming larger than ever, are more retailers ready to adopt dynamic pricing? Here are some considerations to keep in mind.

‘The Complexity Is Out of Control’

In recent months, I’ve heard a lot of retailers say, ‘Pricing decisions are increasingly strategic to our business.’

Pricing decisions were always strategic; it’s just that current marketplace complexity has made highly manual pricing processes impossible to execute at scale.

As new channels, retail formats and competitors emerge, it will become even harder for pricing teams to understand market dynamics as they evolve, let alone take action.

For example, let’s say a pricing manager can focus on managing 100 key-value items out of 1,000 products in a category. However, due to bandwidth issues, the manager will inevitably lose track of products not identified as key-value items.

These lower-visibility items often offer some of the best margin potential opportunities for retailers; thus, it is important to be able to price these items in a way that maximises margin.

This is particularly true in an inflationary environment, as the ability to raise prices on items seen as less critical by shoppers is what funds retailers’ ability to keep prices steady – or even to lower prices – on high-visibility items, such as bread and bananas.

The Role of AI in Retail Pricing

Successful adoption of AI in retail pricing is no longer the exclusive domain of Amazon.

Leading retailers are leveraging AI to respond to marketplace volatility, as AI systems can scale to every product, every store and every customer as needed. AI can also be used to simulate and forecast the impact of promotion and markdown activity and factor in other variables, such as seasonality, events, inventory levels and even novel scenarios like record-level inflation or the multifaceted effects of Covid-19.

Equipped with AI-backed price optimisation software, pricing teams can use customer behaviour in all its variations to determine the optimal price by category, product, retail format and region, and manage those prices dynamically as customer behaviour, market conditions and competitive activity evolve.

Dynamic or Not – Just Make It Fair

No matter how advanced the technology has become, some retailers still have reservations about frequent price changes due to concerns about how customers might react. This belief stems from the misconception that dynamic pricing is only used to improve profits. While that is certainly part of the equation, a lot of retailers genuinely care about offering shoppers the most competitive price for a product and being rewarded with customer loyalty for doing so.

Dynamic pricing, at its core, is not just about changing prices more often. It’s about understanding consumer signals in real time and translating those signals into optimal pricing decisions. By leveraging consumer inputs to derive pricing, retailers will ultimately arrive at the most consumer-friendly pricing practices.

On the journey to dynamic pricing, it’s also worth noting that there is no one-size fits all approach. Dynamic pricing for some retailers might mean shifting from once-a-month price changes to weekly, and for others, that shift might be from daily to intraday repricing.

No matter what cadence a retailer adopts for pricing changes, what really matters to shoppers is the perception of fair pricing. As long as consumers trust that prices are fair, transparent and non-arbitrary, dynamic pricing will continue to play an important role in retailers’ customer-centric and data-driven transformation.