Real-time pricing using artificial intelligence (AI) has long been the order of the day in e-commerce – after all today’s customer is a bargain hunter who is always looking for the best price. Meanwhile, brick-and-mortar retail is (still) lagging behind.
In e-commerce, a fierce price war is raging and there is no end in sight. Big online players like Amazon change the prices of their articles several times a day. Sometimes the price jumps even amount to several hundred euros. These flexible price adjustments in real time, also known as dynamic pricing, are made possible by machine learning algorithms, which continuously determine the optimal price for a product based on various influencing factors. By now, almost all online shops have jumped on the bandwagon and are using AI to enable dynamic pricing. Customers have understood that it is worth comparing the prices of different online shops and waiting for the right time to buy. At the same time, however, online retailers want to exploit customers’ maximum willingness to pay in order to remain competitive.
Dynamic Pricing: Many factors – many prices
In AI-based dynamic pricing, a large number of influencing factors determine the price:
• production costs or purchase prices
• competitive prices
• current availability of the product / supply and demand
• day of the week
• regional factors
• store / website traffic
• real-time information from the online shop, such as clicks, purchases, shopping baskets
• purchase history of the customer
This data flows into the calculations of the machine learning algorithms, which continuously adjust prices in real-time. E-commerce retailers always try to exploit the price acceptance of the customer as far as possible, without losing him to the competition. It is also important for online retailers to commit themselves to a clear pricing strategy according to which the algorithms work. The best known are:
• high price vs. low price strategy
• price differentiation, i.e. discounts or surcharges depending on customer group
• penetration vs. skimming strategy
Dynamic prices in brick-and-mortar retail: Not possible? Yes, it is!
Brick-and-mortar retailers often feel helpless in the face of this development. Nothing can be done to compete against the dynamic pricing of e-commerce – so the widespread opinion. Firstly, multiple daily price adjustments are not feasible, as price tags have to be exchanged manually. Secondly, brick-and-mortar retailers do not possess as much data as their online competitors and therefore cannot make as flexible adjustments as online retail does with the help of AI.
But that’s wrong! Brick-and-mortar retailers can also take advantage of AI and significantly increase their sales, turnover and profits through intelligent price management. Because they too have access to a lot of data.
Cloud-based AI platforms: The sooner the better
However, there is still one problem: Retailers cannot effectively manage the huge number of influencing factors in pricing via a manual process. Rather, they need systemic support in the form of software solutions that use algorithms to determine the relevant influencing factors, analyse these factors and then play out price recommendations in real-time. Cloud-based AI platforms are best suited for this purpose, as they enable flexible price adjustments in real-time by constantly monitoring competitive prices, local demand and current events (→ How does this work?). Ultimately, in competition with e-commerce, retailers have no choice but to optimize and automate their pricing with AI and self-learning algorithms. So, the question is not whether retailers should use AI, but how long they want to wait!
Brief outlook on the future of retail: Electronic shelf labels
There is also an end in sight when it comes to the manual modification of price tags in brick-and-mortar retail: Electronic shelf labels with digital displays enable price adjustments in real-time. They have long been used by large chains such as Rewe and MediaMarkt. It’s only a matter of time before the rest of the retail industry follows suit. After all, those who refuse to accept the changes in the industry will fall behind in the end. That much is certain.