Why are buyers charged differently for the same offering? This is a common scenario with airlines, hotels, and any online retail offering for that matter. Dynamic pricing creates different prices for different customers and circumstances. Leveraging AI for dynamic pricing is becoming a norm, the use of algorithms to find the ideal pricing helps improves revenue outcomes, and lower the guesswork. One core advantage of dynamic pricing is the ability to maximise profits with each customer.
With the rise in online retail, algorithmic pricing is increasingly being adopted by retailers and marketplaces, allowing them to gain an edge over their competitors. Online retail fulfils two of the fundamental needs of algorithmic pricing:
- Large amount of data that enables the creation of robust statistical models of customer behaviour
- Ability to change prices instantly and efficiently
How does algorithmic pricing work?
An AI engine translates the buyer’s behaviour into a persona by using the data fed into the system. This data could be the types of items the buyer is looking at, the time spent on each web page, items purchased and items currently in the bag. Furthermore, data can also be gathered from traditional sources like real time local events. This enables businesses to leverage AI for gathering asymmetric information enabling them to predict the demand more accurately and making strategic price decisions. The AI engine then tries to estimate the ‘maximum price’ the buyer is willing to pay. This ‘willingness to pay’ is subsequently translated into the price for that buyer at that moment.
Which industries use dynamic pricing?
Transportation: dynamic price optimisation for ride-share companies
Uber with its surge pricing relies extensively on ML to establish a robust and reliable dynamic pricing system
Hospitality: effective inventory allocation with flexible room rates
Hilton uses ML-based system to increase demand forecasting
eCommerce: machine learning-driven pricing optimisation for a fashion retailer
Amazon and eBay use dynamic pricing to offer customised prices