The opportunities and challenges of AI-driven dynamic pricing
The advent of AI has presented companies with new opportunities to reach customers with dynamic pricing. Danilo Zatta, the head of pricing at professional services firm Valcon, explores how AI-based pricing may change the sales process in 2024.
Dynamic pricing – or surge pricing, demand pricing, time-based pricing – has been around for a while. Parents know very well they pay higher prices for flights and accommodation during summer, Easter and Christmas vacations. As demand for holidays soars when schools are out, prices are positively correlated. With the advent of artificial intelligence (AI), technologies and algorithms are increasingly being used to determine the optimal prices for goods and services.
Brewers Stonegate Group, owners of the Slug and Lettuce, faced a backlash back in September when they announced the introduction of dynamic pricing and a plan to push up prices at busier periods. Halfords has also recently introduced dynamic pricing in its autocentre business in a bid to drive up the utilisation of all its garages.
Despite the mixed responses from customers, with high inflation and sluggish economic growth, we will definitely see more companies introducing AI-based pricing in the New Year. The key trends coming down the track will be:
Need to manage volatile ‘willingness to pay’ will trigger uplift in AI pricing
Though inflation is coming down, it’s still present (at around 4% in Europe, dropping from over 10% earlier this year). And economic growth is still sluggish in many countries, while some are already in recession. The geopolitical environment contributes to the uncertainty. This impacts people’s ‘willingness to pay’ which will remain volatile. This will force companies to become better equipped in detecting and capturing ‘willingness to pay’ amongst their customer base, with company specific AI applications – for example, an AI discount recommender is an algorithm that optimises discounts based on machine learning. These applications will become more widespread.
Use of AI-based pricing as a supply and demand management tool
High-performing companies are using supply and demand management as a strategic pricing tool, adjusting prices according to market conditions to optimise sales and inventory. The impact of global supply chain dynamics on pricing requires agile and responsive strategies to manage profits and satisfy customer needs. This trend underscores the need for businesses to prioritise adaptive pricing in the unpredictable and interconnected global market.
Demand for AI pricing experts
With pricing becoming dynamic and in continuous flux, rather than fixed and reviewed on an occasional basis, leading companies will recognise the need for talent acquisition and retention around pricing. We think there will be a big uplift in 2024. Encouraging pricing professionals to use AI will empower them, enable the organisation to take advantage of disruptive technologies and capitalise on value creation. Roles like Chief AI Pricing Director will be created and data scientists will increasingly become assets.
Investments in AI will have a strict eye on value
More and more focus will be put in prioritising scalable, value-driven AI applications, discerning when to cease underperforming pilots and intensify successful ones. They will balance short-term return on investment (ROI) with long-term innovation, investing significantly in data-driven initiatives. Given the macroeconomic situation, there will be no room for latent value delivery.
AI pricing trends in B2B markets
We think AI will play a transformative role in the B2B sales and pricing environment next year. It will support areas such as customer segmentation and personalisation, predictive analytics and relative price setting, automated cross and upselling, automated decision making and performance tracking. We think the big sector players will be logistics and cargo, manufacturing, technology and software for businesses.
AI pricing trends in consumer markets
B2C was an earlier adopter of AI based pricing than B2B markets and we will continue to see take up in 2024. Retail, FMCG and fashion companies will continue to use AI in promotion optimisation and dynamic pricing and this will persist as fashion companies seek to react more quickly to ‘willingness to pay’ and optimise seasonal mark downs. In travel and hospitality, we think potential will be unlocked with revenue management as companies embrace AI for better planning, capacity utilisation, staffing and pricing according to historical trends and also it will be used for anticipating future demand and elasticities. We will also see a growth in AI pricing in the media and automation sectors.
AI based pricing is changing the face of how companies have traditionally approached economics. Supply and demand, then pricing accordingly has become a much more fluid concept. Companies are adopting AI to change pricing according to how busy a pub is, how full an aeroplane or hotel is, how quickly they need to get rid of old clothing stock. It is transforming the nature of the ‘company and customer’ dynamic. In tougher economic times, companies need to find a way to manage their revenue, margins and crucially, a customer’s propensity to pay. And in 2024, AI based pricing will help them do just that.
Valcon is a north-western European consulting, technology and data company based in the Netherlands, Denmark, UK, Sweden, Germany and Croatia. The firm was named as part of Consultancy.uk’s 2023 Top Consultancies list – with platinum ratings in the business intelligence and process management categories.
