The right pricing for your products or services is key to maximizing your sales and bottom line. Price optimization based on real-world data can help you set a price point that balances profitability and customer value.
Business owners can leverage artificial intelligence (AI) tools to streamline the process of gathering and analyzing this data to set ideal prices. The result is an optimal dollar amount or range for each offering that meets the "sweet spot" of value, desirability, and business profit.
Ben Schreiner, Head of Business Innovation for small- and medium-size businesses (SMBs) at Amazon Web Services, said data-driven pricing can be highly beneficial to SMBs.
"Charging customers who derive greater benefits from a product or service more than others can enhance the profitability of that customer segment," Schreiner told CO—. "By using data to make more informed decisions, SMBs can adapt more effectively and successfully, which is necessary in our changing market conditions."
[Read more: 4 Ways to Competitively Price Your Products Without Devaluing Your Brand]
How AI can inform and improve price optimization strategies
AI-powered price optimization leverages algorithms to process real-time market data to generate the best pricing strategy. To establish the ideal price for your business's goods or services, AI price optimization software might look at the following data categories:
- Customer data (surveys, demographic data, and behavioral data).
- Business data (historical sales data, operating costs, and a competitive analysis).
- Broader market data (e.g., geographic-specific information, overall economic patterns, and fluctuations in market demand).
In addition to establishing a singular optimal price (or set of prices), AI can also assist with personalized pricing and dynamic pricing. With personalized pricing, AI-based analytics can parse vast amounts of customer data to create optimal pricing plans for each customer. In dynamic pricing, AI-based predictive analytics tools can adjust prices in real time based on current market conditions and demand (think of Uber’s “surge pricing” during peak hours or discounted retail prices when sales are slower).
According to Gabe Wight, General Manager of Retail E-commerce Analytics at 1WorldSync, dynamic pricing offers significant advantages for small businesses, including greater flexibility and adaptability in response to changing demand or profit margins.
"This adaptability ensures efficient inventory management by preventing stock from stagnating on shelves and tying up capital," said Wight.
[Read More: What AI Can't Do for Your Small Business]
Charging customers who derive greater benefits from a product or service more than others can enhance the profitability of that customer segment. By using data to make more informed decisions, SMBs can adapt more effectively and successfully, which is necessary in our changing market conditions.
Ben Schreiner, Head of Business Innovation for SMBs at Amazon Web Services
The challenges of price optimization
While AI-powered price optimization can be a great business strategy, there are some challenges business owners may face when implementing it.
Sukki Yoon, Ph.D., a Professor of Marketing at Bryant University, noted that while real-time price adjustments can enhance competitiveness and boost profits, small business customers are more likely to notice price changes. Without clear communication about dynamic pricing strategies, customers may perceive the changes as unfair, or their trust in your business may erode.
"A local cafe could alienate regulars by varying coffee prices throughout the day based on demand," said Yoon. "It is important for customers to understand and accept the reasons for paying more or less as demand fluctuates."
Similarly, Reilly Newman, Founder of Motif Brands, advised making customers aware of your pricing approach to mitigate a negative perception.
"The awareness alone will be well received, just like with airline tickets and hotels, where all buyers are aware of the prices adjusting according to demand," Newman explained.
Best practices for AI price optimization
There are numerous AI-powered pricing tools to help businesses get started with price optimization, including Amazon Web Services, IntelligenceNode, Pricefx, Sniffie.io, and Accenture's Solutions.AI for Pricing. However, there are a few logistical considerations to consider before moving forward.
Following a few best practices can help mitigate challenges and ensure the most accurate pricing possible.
Know which factors are the most influential for your pricing and profitability
Before exploring dynamic pricing strategies, Schreiner recommended that SMBs explore the factors and variables that influence the pricing and profitability of their offerings.
"Gathering as much data as possible is crucial at this stage to analyze and assess the potential for increased profitability and return on investment," he said.
Start small and experiment
Though price optimization is becoming more common in certain industries, Wight advised using it as "a scalpel, not a sledgehammer."
"Gather data, start small by experimenting with a single category or a few key items, and continually assess the impact on your customers and bottom line," Wight added.
Educate and reward your customers
Small businesses should clearly communicate any new pricing strategies to ensure their customers see the benefits of this approach.
"Encourage them to consider other factors, such as ambiance and service quality, rather than just price," said Yoon.
Yoon also advised offering rewards to your "regulars," as in his hypothetical coffee shop example.
"[They] could dynamically adjust the prices of seasonal beverages to reflect demand while providing loyal customers with special discounts, blending profitability with a strong community feel," he added.
[Read more: What Are Tiered Pricing Models?]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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