How AI-powered pricing is shaping the customer experience

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Whether customers realize it or not, pricing optimization technology is already playing an important role in the online shopping experience, writes Pini Mandel, CEO and Co-Founder of Quicklizard.

Price is one of the most interesting elements in any sales environment. For starters, it divides people into two groups – those who can afford the item and those who cannot.

More importantly, pricing sets expectations for the entire experience. Discount stores are usually less maintained, with brighter lights and a poorer atmosphere. We know when we walk into the store what to expect, just as we know that expensive stores create an ambiance of expectation by adding music, well-dressed sales personnel and atmosphere into the buying experience.

However, even though the price was tied to the experience a customer received, it hasn’t always been perceived as part of the customer experience. Unfortunately for many businesses, that lack of awareness often leads to underpriced merchandise or lost sales.

Creating the Optimal Customer Experience

Consumers have an expectation for what a product should cost. They know that a pair of Nike sneakers should cost around $60-$70 at Kohl’s, while high-end Nike’s will cost $150 or more at the Nike store. They know what a TV should cost, and the different price points for different sizes, screens and brands.

When the price of an item matches the consumer’s perceived value for the product, the customer experience is positive. A candy bar in a gas station may be higher priced than the same one at a supermarket, but the consumer recognizes the value in convenience, and is willing to pay a premium for it. The customer experience buying that higher-priced candy bar isn’t impacted by the higher price.

It would seem that developing optimized prices for each item would be a priority for any retailer interested in delivering the expected customer experience. And yet, we often see breakdowns in customer experience around price.

The Difficulty of Pricing Right

If you’re a multichannel retailer selling hundreds of thousands of items, you already know how difficult it is to optimize the price of each item. Because of the existing obstacles to pricing optimization, most retailers are only able to optimize pricing for 5%-15% of their catalog. The other 85%-95% of their merchandise is subject to some formula, factoring in the cost of the item, shipping costs, and selling costs, and adding on profit margin.

The prices for the overwhelming majority of items are left to the rule-based functions of an Excel spreadsheet. It’s less than ideal, because those calculations don’t consider the customer’s perceived value, and often fail at delivering the perfect customer experience.

Getting Pricing Right with AI

Artificial intelligence (AI) is a game-changer when it comes to pricing items correctly. When deployed, it can optimize the price on millions of items, drawing from multiple sources of data. Rather than optimizing a small fraction of the items on the shelf, AI-based pricing optimization tools ensure that every item is priced correctly.

For customers walking through the store or clicking through online listings, optimized pricing means finding the merchandise they are looking for at an optimized price.

The enhanced experience is powerful, and we’ve seen it lead to double-digit increases in revenue, and have a profound impact on profit margins.

We’re already seeing AI-based pricing optimization in stores across the United States and Europe. Grocery stores, sporting goods stores, and electronics chains are just three verticals that are embracing AI-based pricing optimization tools, using the tools to manage the hundreds of thousands of items that they sell.

We expect to see more AI-driven pricing in physical stores over the next two years, which aligns with the time frame we see more electronic shelf labels or digital price tags on the shelves. Whether they realise it or not, most online shoppers have been exposed to AI-powered pricing, which may explain why so many consumers enjoy their customer experience while shopping online.

AI-based pricing is fairly seamless and typically takes place without the customer knowing the mechanism behind the price. Customers may not realize that the prices on their merchandise were calculated using AI, but they do recognize that their merchandise is set at the right price, capping off the expected customer experience. Ultimately, this is how AI-powered pricing optimization will shape the pricing aspect of the customer experience in decades to come.

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