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W H I T E PA P E R

How Can B2C Retailers Price Towards Their Customers

COPYRIGHT © 2018 YIELDIGO, s.r.o.

All rights reserved. This paper may not be reproduced in whole or in part, in any form without written permission from the publishers, except by a reviewer who may quote passages in a review.

Executive Summary When determining optimal prices, pricing analysts are exposed to an avalanche of collected data, 95% of which is considered as noise. Pricing analysts are becoming a bottleneck to growth; retailers need an automated and intelligent way to perform pricing analysis as the task is to determine optimal prices for hundreds or thousands of articles a day. While retailers struggle to hire great pricing analysts, pricing scientists propose that technology will ensure pricing analysts evolve into pricing managers operating this technology. There is a significant shift toward Customer-Centric AI driven pricing as big data underperformed to expectations and failed to deliver incremental growth. Companies using Customer-Centric AI Pricing witness a 5–20% increase in profitability while preserving their turnover. AI has the ability to manage 98% of article prices. Retailers should request a trial of such an AI system, measure it and move on. Retailers who embrace change will leverage the financial gain previously hidden within pricing. Yieldigo Customer-Centric AI Pricing supports bottom-up innovation in regular shelf price optimization through the precise understanding of customers’ purchasing behavior; the result is price followers become market leaders. Retailers will achieve up to 20% increase in profitability with Yieldigo; they may try it and then pay for the value they get. Yieldigo is a Prague based company delivering top class results in price optimization in the retail domain. These days it scales across Europe from Germany, Poland, the United Kingdom to Romania and Spain.

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Table of contents Introduction Strawberries and Pricing Customer not at the Center of Pricing Big Data below its Expectations From Data to Customer-Centric AI Pricing A Roadmap Towards Customer-Centric AI Pricing How Can Retailers Benefit from Customer-Centric AI Pricing Platform? 1. AI Pricing as a Service

2. The Hidden Threat of Competitive Market

3. The CFO Perspective

4. Developed to Be Adopted in Weeks

The Future of Data-driven Pricing is AI-driven Pricing

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“Why have our grocery profits decreased?” asked the CEO. “We have suspended the price optimization vendor for the contracting phase,” was the unsure response. The price optimization platform was immediately switchedon again and profits returned to their improved position. The next day category

onto shelves and the profit decline

managers were taken off pricing

receded. Consequently, the board

responsibilities. It became apparent

made the decision to include other

AI Pricing see a 5–20% increase in

that over the last fifteen years the

assortment categories into AI price

pricing decisions of the category

optimization.

profitability while preserving the

profitability amounting to millions

It is not widely known that there are

of USD. The three-person pricing

already segments in which Machine

department combined with one

Learning and AI are able to manage

Artificial Intelligence (AI) platform,

98% of the prices in an automated,

gained pricing supremacy.

optimized process which achieves

Companies using Customer-Centric

turnover trend.

managers had resulted in loss

better results than a human ever This CEO of a well-known global

could. These segments include

retailer was one of the few people

groceries, drugstores, pharmacies,

who realized that pricing is no

electronics and pet-food retailers, to

longer a monotonous function but a

name a few. Fear of change, lack of

customer focused communication

understanding, and limited technical

channel requiring flawless definition

appreciation are some of the factors

and management. The day following

holding retailers back from achieving

the decision, dozens of employees

their full profit potential.

again began placing new price tags

I N TR ODU C TI ON

3

Strawberries and Pricing Price is not just a number, it is a message to the customers. If they do not understand it they are as confused as with any other incomprehensible message. This confusion leads to customers leaving the purchase unrealized.

Pricing is ... Unintuitive

Two things: First, purchasing the

By Mark Stiving, Ph.D., Pricing

strawberries was a sunk cost.

Expert and Pragmatic Marketing Instructor

Once the store owned the

The other night a colleague from

strawberries, they would either sell

Ireland told me this story about

them or throw them away. It is

his father. Jack managed a small

better to sell them at cost, or even

grocery store in Ireland many

below cost, than to trash them. The

years ago. In Ireland, Strawberries

choice is some revenue or none.

and Cream were a popular dish,

Pretty obvious when you look at it

so Jack would buy strawberries

that way. Sunk costs (dollars already

for a Shilling and sell them for 2

spent) are never relevant to pricing

Shillings. (The numbers are made

decisions. Second, customers who

up, but go with the point.) However,

bought the strawberries (at cost)

the store was closed on Sundays,

also bought cream. The store made

so strawberries that were not sold

plenty of money on cream. Notice

by Saturday night were thrown

that this is an example of pricing a

out, and that is what they did. Then

product portfolio with complements.

Jack got a new boss. When the

Pricing aggressively on one product,

new boss heard of the practice of

strawberries, influences the sale of

throwing away unsold strawberries

complementary products, cream, at

he told Jack to lower the price of

better margins. If you are a regular

strawberries on Saturday afternoon

reader of this blog, then you probably

to a shilling. Jack protested, “we

immediately saw these two points in

can’t make any money selling them

Jack’s story. Those around you who

for a shilling, that’s what we bought

don’t study pricing probably didn’t

them for.” But he did what the new

get these two points until after they

boss ordered. They sold all of their

were explained. The world is full of

strawberries by the time the store

Jacks. Not stupid, just not aware

closed on Saturday, but many of

of the nuances of pricing. We are

them only at their cost. As my friend

always teaching.

tells the story about his own father, “It wasn’t until Sunday afternoon that he suddenly realized how brilliant

Source: https://pragmaticmarketing. com/blog/pricing/pricing-is-unintuitive

this was.” What makes this brilliant?

STR AW B ER R I ES AN D P R I C I N G

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Customer not in the Center of Pricing Status quo to bridge: shelf price changes are made in case of cost price skips, or when promotion is applied, not because of the customers’ willingness to pay would shift.

The “software eats retail” quote

method analyses the customers’

used by Marc Andreessen, Silicon

willingness to pay in relation to

Valley investor and founder of

the retailer’s proposition, including

Netscape, has become more

assortment, store environment,

relevant in recent years. Retail is

services, and many other factors.

now massively innovative in many areas, including pricing. Following

One shot at making a fair price

airlines and hotels, this trend is now

Throughout history, the sell and

entering retail. Some retailers offer

purchase processes were realized

discounts or promotions. The latter

through face to face contact

are increasingly seen as marketing

between two parties. People tried

tactics rather than an execution of

to understand the value of their

pricing with real profitability benefits.

goods in comparison with the other

While the setting of promotion prices

party’s needs. Finally, they set the

is still mainly about the negotiation

price accordingly; there was still the

between the retailer and the supplier

possibility to renegotiate the price.

involving creativity and insight, the

Human contact and negotiation

setting of regular prices is a more

played a crucial role in the process.

routine process that lends itself to

These days, if the shelf price is not

being fully optimized and automated

right, the purchase simply does not

using AI. This paper is about regular

occur. Purchasing is becoming even

price optimization using AI.

more autonomous.

The overlooked customer

Which price is better

The cost-plus method is currently

More than 99% of retail pricing

the most widespread pricing method

analysts are unable to answer

used. Continuous technical innovation

promptly essential questions

has enabled another method to be

regarding pricing such as: “Which

used by retailers – price-following.

one of two specific shelf prices for

The former method protects the

an article can bring more profit?” Not

retailers’ %-margin, the latter keeps

knowing this information may result

them competitive on the market.

in performing up to 20% below their

Where these methods fall short is in

profit potential. This is not their fault

their focus on the customer. Neither

but a true observation all the same.

C U STOM ER N OT I N TH E C ENTR E OF P R I C I N G

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Big Data below its Expectations “I am convinced that pricing based on AI can help us find a better way to the customer and better economical results, than our employees could ever expect to achieve. How can I convince others in

It has been about ten years since

Pricing analysts’ hard mission

data have become the new golden

As retailers are demonstrably not

commodity. Large volumes of

using big data to set better prices, it

information inundated companies’

cannot simply be regarded as gold

managers and data analysts. It can

in its own right. Beneath the mass of

be assumed that the ambitious

data, pricing analysts are struggling

promise of big data has remained

to explain why big data cannot

largely unfulfilled, buried beneath a

work with regard to their industry’s

mass of information. Data analytics

specific needs. These pricing

companies conservatively estimate

analysts are becoming a bottleneck

that at any given moment more

to growth, as they are forced to go

than 95% of available data is not

wade through a torrent of collected

immediately useful – it is regarded

data, more than 95% of which is

as noise.

useless information. It is quite

the company?”

obvious, that no army of pricing

Member of the board, E-grocery supermarket, CEE region

articles in 300 stores optimally.

analysts could possibly price 10,000

Triple challenge Pricing analysts are

Thinking, “my business

Retailers need to

becoming a barrier to

requires a special

start challenging old

growth, retailers need

approach to price,” is the

paradigms about price

to find an automated

first obstacle retailers

and assortment if they

and optimal way of

need to overcome on

want to unleash real

performing pricing.

their way to optimal

pricing potential.

prices.

B I G DATA B ELOW I TS EX P EC TATI ON S

6

From Data to Customer-Centric AI Pricing Pricing managers will become true leaders who will manage the AI Pricing platforms.

It was in the summer 2018 when

could not. This trend was corroborated

Robert Hetu from Gartner identified

by Gartner’s research among retail

trends in technology within retail

CIOs where more than 25% of them

industry in the lead with AI, utilizing

had deployed AI and were actively

advanced machine learning and

testing it, or intended to do so in the

focusing on the customer as the

short-term (see figure below).

center of all retailers’ interest. It is AI which should finally cross the imaginary border line that big data

FR OM DATA TO C U STOM ER - C EN TR I C AI P R I C I N G

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A new field:

Yieldigo is in the center of this new

Customer-Centric AI Pricing

domain. Thanks to a combination of

The idea that pricing analysts would

machine learning, neural networks

process the increasing amount of

and graph AI, we get the best

data, look for, and find trends leading

out of several progressive fields.

to repeatedly better prices is simply

Yieldigo creates a unique platform

becoming less significant. While

for calculating prices based on

retailers struggle to hire great pricing

the simulation of customers’

analysts, many pricing scientists

purchasing behavior. Customer-

propose that technology will soon

Centric pricing closely followed by a

make pricing analysts unnecessary.

strong focus on real and measurable

There are some who are signaling a

business outcomes and the needs

radical incline towards automated

of both C-level and operative

pricing using AI. This, together with

management – these are the points

the trend to put the customer back

which differentiate it from simple

into the center of focus, creates the

spreadsheets, pricing consultants,

basis for a new area: Customer-

and CPQ (Configure-Price-Quote)

Centric AI Pricing. Implementing the

tools. Pricing managers that use

customer-centricity in their pricing

Yieldigo are responsible for the

will help retailers to improve their

setting of the price ranges where

engagement with customers. This

Yieldigo searches for optimal prices

translates into improved profitability,

and overall pricing strategy, while

higher turnover, better customer

constantly receiving support for

retention, and greater loyalty.

their decisions from the application. The ranges are the source of the freedom which AI can utilize and transform into new profit. Pricing managers become the creators of the pricing strategy, while the pricing tactics (calculation of optimal prices) becomes the domain of the AI platform. AI is an underwhelming topic due to its complexity and deep implication for business processes. Nonetheless, retailers with no plans or interest in AI will likely fall behind and their businesses may face irreversible harm.

FR OM DATA TO C U STOM ER - C EN TR I C AI P R I C I N G

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A Roadmap Towards Customer-Centric AI Pricing Manual

Data collection

Pricing

Big

Pricing

work

and warehousing

automation

data

analytics

CustomerCentric AI Pricing

The more a business is “on the right”, the greater financial benefit the retailer can expect thanks to its technological stack. The light grey phases are not profitable on their own, the dark grey ones might be while the green one will be by definition.

It is an uncomfortable truth that mathematicians and pricing scientists are closer to defining optimal shelf prices than pricing analysts will ever be.

The pricing paradox

the real value but the so-called

In one study, researchers gave a

perceived value, which is in their

variety of users a choice of either

subconscious. The problem arises

purchasing a pack of bubble gum

if the retailer is selling the goods for

or keeping the money. When given a

a price reflecting the value which is

choice between two packs of bubble

vastly different from the perceived

gum, only 46% made the purchase,

value. This is the reason why value-

when both were priced at 63 cents.

based pricing and simulations of

Conversely, when the packs of

customers’ purchasing behavior is

bubble gum were differently priced

absolutely crucial when thinking of

– at 62 cents and 64 cents – more

optimal prices.

than 77% of customers chose to buy a pack. This only underlines the fact that the customers are not buying

Source: https://www.helpscout.net/ blog/pricing-strategies/

A R OADM AP TOWAR DS C U STOM ER - C EN TR I C AI P R I C I N G

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Dozens of factors come into play when customers make decisions about a purchase.

How Can Retailers Benefit from Customer-Centric AI Pricing Platform? A R OADM AP TOWAR DS C U STOM ER - C EN TR I C AI P R I C I N G

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AI Pricing as a Service

1

Shelf prices for 98% of articles can be managed by AI which brings measurable

Pricing is a win-win game between

assortments. The greatest article and

the retailer and customers. Retailers

store granularity...