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Ethics is an intrinsic and misunderstood part of customer intimacy and AI-driven pricing.
When Levi’s Announcing in its Q1 earnings call that it had increased its average unit retail (AUR) by 10% without negatively impacting demand, Wall Street analysts were eager to hear how they achieved this feat. Like any other retailer, inflation and supply chain pressures have impacted Levi’s global inputs and logistics. CEO Chip Bergha explained [subscription required] that the company had increased margins by “applying analytics, including artificial intelligence and methodological analysis of price elasticity.”
While AI-powered pricing As technology matures and gains conversions across a wide range of retail sectors, the public remains largely ignorant of how pricing approaches have changed and why. AI-driven pricing has matured amid a series of significant pricing pressures, including pandemic-induced product shortages, supply chain problems and high inflation distorting margins and prices.
Consumers feel the inflation in the supermarket and when refueling gas vehicles. Through March, consumer price index data tracked a 8.5% year on year increase in food prices. As a result, consumer confidence, or the measure of consumer confidence (and willingness to spend), is falling sharply from 32% year-on-year through March. Despite significant retail cost pressures, these data suggest that now is a bad time to pass on cost increases directly to consumers.
Today, 44% of retailers use price optimization tools, according to a march study by RSR research. (Although that percentage is a bit skewed because most major retailers use it.) Retailers are embracing AI-powered pricing because it allows them to increase sales, improve overall margins and improve price mix despite inflation, according to the report. RSR study.
Few customers realize the magnitude of AI-powered pricing adoption or how it applies to their purchases. For many people, their first and perhaps only negative experience was “surge” pricing through ride, entertainment or travel applications. Aside from that, AI pricing is neither positively nor negatively branded in the minds of consumers. They may not realize how it benefits them and retailers or what the technology can do.
The ethics of AI
Some observers fear that AI has the potential to harm consumers. Without citing specific examples, a Harvard Business Review article last year warned that “powered pricing strategies can do real harm to individuals, organizations and societies.” Deploying this technology runs the risk of “harming people and outraging customers,” the authors said.
Of course, damage is neither an intended nor an unintended consequence of AI-powered pricing. AI Pricing algorithms are trained to listen to customers and determine the most favorable prices to enable purchases. AI doesn’t change economic facts – an overpriced item can lead to a lost purchase. Consistently overpriced products cause stores to lose customers.
From the onset of the pandemic, consumers and government watchdogs have expressed deep concern about the possibility of price inflation amid pandemic-related product shortages. Many prices have risen steadily, some sharply, especially in the beginning. AI-powered pricing has not exacerbated this problem. While AI-powered pricing systems could, in theory, accelerate price boosts; in practice they prevent it from happening on a large scale. Algorithms, like merchandisers, must follow the rules set by retailers. Price gouging was unethical before the dawn of artificial intelligenceand it remains subject to criminal penalties in both physical and e-commerce environments.
AI-powered pricing systems track consumer preferences, including how customers view items, and prices based on these and other factors, such as promotions, store locations, or how competitors price the same item. The model assesses elasticity and formulates price recommendations based on these forecasts. The algorithm can also predict the impact of an imminent price change, protecting both retailers and consumers, not to mention the upstream supply chain.
Customer intimacy is a key objective of AI-powered pricing systems. As we’ve seen under “personalization,” a retailer who knows you have a preference for sports teams in your hometown can suggest relevant products, tickets, or other services to you. If an AI pricing model knows that a consumer always buys certain branded products, it can offer a discount or coupon on a private label product to influence those preferences. In this scenario, the intent is to increase consumer value and encourage repeat purchases that lead to better business outcomes for the retailer.
A nuanced pricing strategy
Today, consumers have low awareness of AI applications, much less AI pricing. A study of 1,000 U.S. consumers in 2020 found that 43% weren’t sure what AI is or how it’s used, and most had a lukewarm acceptance of it, according to Blue Fountain Media.
Consumers, like many retailers, are still first impressions of the technology and how it is implemented. One area where consumers and retailers may see things differently is the frequency of price adjustments. For retailers, AI-powered pricing allows them to take a nuanced approach to pricing and margins.
Conventional wisdom holds that too much change can erode consumer confidence.
However, the leading e-commerce retailer is known not to adhere to this rule. Amazon changes product prices an average of 2.5 million times a day and the average product price will change about every 10 minutes, according to Business Insider†
Observers say Amazon makes regular price adjustments to ensure it always has the lowest (or at least highly) competitive prices for basic consumer goods. But then, according to Business Insider, it will “actually raise the prices of unusual products,” improving margins. Amazon is constantly communicating with buyers to determine their preferences and understand their shopping habits. The result? Greater customer intimacy, stronger customer loyalty and higher sales margins.
Customer intimacy is at the heart of ethical AI-driven pricing.
While customer intimacy doesn’t guarantee sellers will take empathetic or ethical pricing actions, it’s likely impossible to achieve those goals without a strong foundation of customer knowledge. These concepts are inextricably linked because understanding customer trends is essential to any successful pricing approach – digital or analog. Merchandisers, data scientists and pricing experts know that customer intelligence leads to smarter pricing decisions as measured by higher loyalty and customer value metrics.
Ethics is an intrinsic part of any price action for customers.
If you do it right, consumers won’t think twice about pricing algorithms and will instead enjoy personalized offers and prices set right in their comfort zone. When done right, customers will be happier and more loyal to retailers that achieve the desired balance between customer value and profitable margins.
Kevin Sterneckert is Chief Strategy Officer at DemandTec†
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