The use of artificial intelligence (AI) software to set retail prices for everything from gasoline to office supplies to groceries and more is growing. This is not about how competition drives down prices. In fact, it’s just the opposite.
The algorithms that power AI pricing software analyze hundreds of thousands of data points on a continuing basis and set prices on what the software believes consumers will be willing to pay. In other words, this about a search for the optimal price – not the lowest one.
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Customers Who Don’t Care
AI pricing software analyzes mountains of historical and real-time data and attempt to determine how consumers will react to a price change under certain scenarios. Tactics are updated based on experience and what the software learns about human behavior.
Basically, the software learns when raising prices drives away customers and when it doesn’t., leading to lower prices at times when price-sensitive customers are likely to drive by, he said.
Ulrik Blichfeldt, chief executive of Denmark-based a2i Systems A/S said, “This is not a matter of stealing more money from your customer. It’s about making margin on people who don’t care, and giving away margin to people who do care.”
Companies Using AI Pricing
Use of AI pricing algorithms is growing in Europe where it appears in gas stations but is also being used in other countries, including the U.S. Almost anything in retail is fair game for AI pricing. Staples Inc. (:SPLSN/A) says it uses AI to set prices on more than 30,000 products daily on its website.
The mother of all online retailers in the U.S., Amazon.com Inc. (NASDAQ:AMZNC) and its third-party sellers, were among the first to adopt dynamic pricing, a precursor to AI pricing. Amazon won’t say if it uses AI pricing but one company, Feedvisor claims it can use algorithmic technology to help Amazon sellers make more profit by adjusting pricing based on consumer behavior.
AI Pricing And Vacation Housing
The second largest vacation rental management company, Vacasa, has been using an AI-based pricing model to determine what to charge for vacation rentals. The technology, called Yield Management 2.0 is being used to set pricing for more than 5,000 rentals across the country.
When Yield Management launched in 2010, it saw an average of 34% more income for homeowners of rentals compared with the competition. As CEO Eric Breon said, “We’re looking for the optimal rate as opposed to what others are pricing at. Even if the competition is priced at $100, it doesn’t mean that the optimal [rate] is $95. If the competition is at $100, we might want to be at $250.”
Questions have been raised about whether or not AI pricing constitutes price fixing. So far neither the EU or the U.S. have taken legal action, partly because it would be difficult to prove illegal intent.
Systems currently available still allow humans to remain in control, which implies competition and potential lower prices for consumers overall. It’s almost certain that the phenomenon will continue to get scrutiny as its use becomes more widespread. Meanwhile, International Business Machines Corp. (NYSE:IBMC) is taking advantage of the AI capabilities of its Watson cognitive-computing engine to provide pricing advice to retailers.