AI is enhancing a variety of industries but what does it look like for pricing software?
What is price optimization and how is AI being used?
To start, Price Optimization is a technique to help businesses make better decisions around pricing, whether the goal is setting a list price, a discount, or a rebate. The goal with any price optimization approach is to use data science to better understand what a customer values about your products, which can help you understand what they may be willing to pay for that product. Price optimization uses data of all kinds to help with this estimation, and then provides recommendations to business users about what level to set a price.
Until very recently, only companies with access to very large data sets in clean formats could hope to leverage science to calculate customer willingness to pay (WTP). Companies such as large supermarket chains with point-of-sale data and data aggregators or airlines with reservation systems that both held data and provided large computing power were the first companies to leverage price optimization.
However, today, many companies have moved their ERP and transaction systems into the cloud, easing access to years of transaction data. There are also many other data sources available, from customer sentiment data to higher-level demand data. Cloud providers such as AWS are offering products such as SageMaker that bring data science capabilities to the broader markets. Businesses are leveraging many different machine learning and AI approaches across the spectrum of price optimization solutions, but the whole point is to deliver the best possible recommendations for your business outcome.
Your company recently announced new features as optian-powered. What is Optian?
Pricefx Optian is the pricing industry’s first and only Multi-Agent Artificial Intelligence (MAAI) technology. Optian solutions use a combination of AI methods, simulation, and optimization to simultaneously solve for best outcomes against multiple constraints and multiple objectives, providing input to various teams across the company, including marketing, sales, pricing, finance, and supply chain.
What we said above about bringing AI to the broader markets is why Pricefx Optian is so powerful. For companies looking to get started with AI and price optimization, Optian provides out-of-the-box access to AI solutions to help with many kinds of business problems. While some providers offer one or perhaps two different solutions, Pricefx offers over 15 solutions. For companies who are farther down the path with AI solutions, Optian is part of Pricefx’s flexible platform, enabling companies to “bring their own science” and leverage analytic methods created in SageMaker or other tools right inside their price management platform.
Optian is an overarching name for all current and new Pricefx optimization capabilities that help companies drive profit and revenue through by implementing price optimization in various business situations.
Optian consists of many capabilities such as Negotiation Guidance, Product Recommendations, List Price Optimization, B2C Shelf Price Optimization, Price Waterfall Optimization, and many others. Negotiation Guidance helps sellers get the right discount to maximize margins and win rate. Product Recommendations help with cross-selling, offering products that customers may find useful but were not part of the initial request. List Price optimization helps set the best list price based on your company goals. B2C Shelf Price Optimization suggests the price point with the highest probability to transact in a non-negotiated environment. Finally, Price Waterfall Optimization simultaneously recommends optimal list prices, discounts, promotions, and rebates, considering multiple competing business objectives. To our knowledge, there are no other pricing software vendors offering a solution like this out of the box.
All of Optian’s capabilities leverage the MAAI engine to help you determine the best discount, the best price, the best rebate, or the combination of all three. Optian is unique in that it allows you to build your business rules inside of the AI engine. Other providers have to layer on rules on top of the optimized output, making it really not all that optimized.
When it comes to pricing optimization and AI, what do companies need to keep in mind?
Macroeconomic effects such as inflation and market volatility are bringing challenges to many companies, and many are turning to AI-based pricing solutions to help them strategically drive more revenue and accelerate profitable growth in these trying times. If your competitors are doing it, should you think about it?
Also, from a practical standpoint, solutions such as price optimization often face large change management hurdles. People do not trust that “the computer” can provide good recommendations. Any solution you consider should be transparent and open, providing easy analytics and outputs that help your people understand from where the recommendation came and why it is what it is. I’ve seen great algorithms fail because they never get used – people just don’t trust them.
What should businesses look for?
The first step is to truly understand what precise business problem you are trying to solve, and what information is needed to help your staff make better decisions around that business problem. The business problem should dictate what kind of AI solution you need.
For example, if you find that “my salespeople have too many products and too many customers to understand what each one may be willing to pay for a particular product,” the output needed may be discount recommendations by the customer and by-product in a band that is consumable by a salesperson. This is a standard problem that many different methods and vendors can solve.
However, if your problem is “I don’t know if my rebate programs are driving the right customer behavior,” you will need a different AI method and a different output. The output here may be a “keep using”, “double down”, or “stop using” flag for each rebate program or type. Understanding the business problem helps you understand what technique, and even what vendor, can help.
Next, we mentioned above that trust in the system is key. Make sure whatever method and tool you are using provides high transparency to your users to help build trust. Even if a particular model can drive 0.1% more improvement, if it is not used, it drives no actual benefit. Also, give users time to become familiar with the system – trust builds over time.
Finally, make sure you’re choosing a robust, sophisticated solution that integrates with your current ERP or SAP, can use the outputs across the entire platform, and will continue to innovate to meet your price optimization needs both today and in the future.
Back to Optian, what makes MAAI special?
There are two primary schools of thought around pricing – classical economics, which say supply and demand drive price, and behavioral economics, which say customers’ perceptions of prices, price changes, and price differences along with their inherent preferences are the driving factor. MAAI mimics the way a complex society of individuals behaves, incorporating and modeling both schools of thought – classical economic models and individual preferences and reactions. The MAAI engine models your customers trying to achieve their individual goals inside of a diverse and dynamic marketplace, with agents/customers changing behaviors from learned interactions or gained knowledge.
MAAI optimization allows you to deal with multiple constraints, multiple objectives, and thousands of parameters and put them all together into one single optimization process for a much more nuanced and holistic approach to price optimization. The objectives can be tuned to focus on revenue, margin, share, or a combination. The outputs can be varied, from a price list to a discount, or a full waterfall optimization. It truly is the next generation of distributed AI.
What can we expect next from Pricefx?
We are always looking for innovative ways to increase efficiency and help companies drive revenue. We hope to continue to stay at the forefront of using AI in pricing through our upcoming product releases.
Doug Fuehne
Sr. VP of Impact at Pricefx
Doug Fuehne is the Senior Vice President of Impact at Pricefx and has over two decades of experience consulting with manufacturers, distributors, and retailers on pricing and supply chain strategy, including over a decade working in pricing software. Doug leads Pricefx’s Impact team, helping customers understand how they can drive value in their business with pricing software across their entire lifecycle. Before Pricefx, Doug led AWS’ Global Supply Chain practice, led Amazon Business’ Customer Success and implementation teams, led presales and professional services at a competitor to Pricefx, and built ecommerce businesses at Deloitte and Enron. Doug enjoys playing guitar, coaching youth sports, hiking the Pacific Northwest and traveling.
