The ideal situation for any pricing team would be a crystal ball letting you know the maximum price your customers are willing to pay. This kind of magic would ensure you always get the largest margins possible without the risk of chasing away potential clients.
Author Nick Saraev
Photo: Freepik
It may sound like a fairy tale, but as technology advances it’s becoming more and more possible. AI’s ability to find patterns and pull actionable insights from data is almost supernatural.
Nick Boyer, the Senior Director of Strategic Consulting for PROS shared at our recent Pricing Excellence event. He explained how “PROS knows” the perfect price based on historical data, market trends, and complex patterns that would be impossible for experts to recognize. With this power on your side, you can price your products with magical accuracy.
Tale as Old as Time: Pricing Before AI
The traditional mode of deciphering the ideal price forms a waterfall. You decide how much different customers are willing to pay based on several factors that break down into
- Product – A global list price based on value and competition
- Customer – The country, channel, and situation that leads to each customer’s purchase
- Transaction – Quantity, frequency, and loyalty
Like a small provincial town at the beginning of a fairy tale, many companies look at this model and say, if it isn’t broken, don’t fix it. However, this style of pricing is more broken than you might think.
The model is complex and time-consuming. To get accurate results fast, your team needs to investigate more comprehensive tools and strategies.
Casting a Spell: How AI Transforms Pricing
There is one major way that AI pricing breaks the fairy tale mould. This isn’t a magical fix-all solution. AI will only partially replace the process of pricing your products.
However, it can provide incredible, in-depth insights hidden within your data. This comes from its ability to recognize patterns that would otherwise be indecipherable.
This data is found within the negotiations you’re already having, in invoices, deals, and agreements. Every bit of knowledge your sales and pricing teams, and your customers’ procurement teams have can be discovered and distilled by AI.
Ultimately, to create a crystal ball that solves your pricing worries, AI will need to examine three core questions.
Question One: Willingness to Pay
For any given customer in any given selling context, what drives their willingness to pay? Which attributes do they value? How much influence does each attribute have?
The attributes that make the biggest impact on customers’ willingness to pay aren’t always the ones you expect.
For example, one of PROS’ clients was a packaging company. They always suspected that the end use of their packages was a driving force for price, but they didn’t realize how much of a force it was.
Other clients found that inventory levels affected prices, or that they could accurately map how time passing affects the prices of their products.
Question Two: Market Trends
What is the impact of time on the price you can charge? If you can charge more, how much more? What are your competitors doing? How do their prices compare to yours?
As time passes, product demand and market trends may change, leading to fluctuations in prices. Companies must also consider the perceived value of their products or services in relation to their competitors. If a company offers higher quality or unique features, it may be able to justify charging higher prices.
Determining this perceived value is challenging, but AI can compare every seemingly disconnected bit of data from years of operation and deduce the best course of action.
Question Three: Win/Lose
Given the data from the previous questions, how much room do you have to shift? What effect would moving the price have on your probability of winning or losing?
This final calculation allows you to optimize your margin and pricing. AI can continuously analyze and adjust pricing in real time, allowing companies to be more agile and responsive to market changes. You’ll always know when to push for a higher price, and when to meet customers where they’re at.
Near to Far: What Is Driving AI Adoption
More and more companies are integrating generative AI into their business practices, with nearly 65% reporting regular usage this year. This generation of AI drives user adoption for two specific reasons.
Accuracy
Once you’ve run models to answer the first two crystal ball questions, you can return to the predictions months later and see their accuracy. PROS has found that their algorithms get predictions right roughly 97.5% of the time.
Because teams can rely on the information coming from AI assistance, they can have full confidence in data-driven decision-making. This level of accuracy was virtually unheard of in the past, making it easy to see how impactful the tool is.
Generated Insights
Beyond simply predicting the perfect price for specific situations, AI can give you an in-depth look at the inner workings of your business. Seeing the connections between seemingly unrelated factors like inventory levels and pricing helps your team be more strategic going forward.
Once Upon a Time: Getting Started With AI
Modern AI uses a lot of data. The information it requires isn’t always relevant to the entire data set, it only needs to be relevant to some. One of the biggest challenges when companies start their AI journey is not having access to that historical data.
For example, to see a pattern between inventory levels and price, you need to have information stored about both. If you want to start empowering your pricing negotiations with AI, you need to ensure you have a way to capture, clean, and store as much data as possible. Even if something doesn’t seem relevant to pricing, it might reveal a powerful insight going forward.
Starting with what you have and developing it more over time lets you build momentum and keep the information coming. This need for data and information means that AI only gets more effective the longer you use it.
Conclusion
Understanding what your products are worth and what clients are willing to pay is a power unlike any other. You can use the insights gleaned from AI pricing analytics to drive your profits and create lasting connections with your customers.
As technology continues to advance, savvy pricing professionals are putting their trust in AI to flag and capitalise on invisible patterns. Working with PROS and bringing AI into your pricing strategy can ensure each of your pricing negotiations gets to happily ever after.
