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January 6, 2020

Digital to Profit: When AI and Machine Learning Meet Pricing

Gabriel Smith

Before I get into the topic of how companies are using AI and machine learning to drive price optimization and gain a competitive advantage, let’s take a step back and get nostalgic for a moment. I remember when the compact disc was first released. We learned that it uses a laser to read a signal off a disc and play music in a much clearer way. I was reminded of this now outdated technology recently when I came across a 2013 study in which a researcher had discovered a technique in which you could use multiple colors of the laser to store a petabyte of information on a DVD.  Yet, this did not result in the resurgence of the DVD or CD. But why not?

The answer is not just about moving from analog to digital. It is about the ability to quickly access and use data that is important. This is the main reason that streaming has taken over entertainment. On the other end of the spectrum, on the supplier side, think about the massive advantage the providers of the streaming services have as compared to those who made DVDs and CDs. They know what is being watched, for how long, what else is being watched. With this plethora of valuable information, they can make AI-driven recommendations that improve the satisfaction and consumption of their customers.  We can also see parallels in the case for digital commerce as compared to brick and mortar.

This data on customer behavior has also been at the fingertips of B2B customers for decades now. The problem is that it has been or is locked on the enterprise equivalent of CDs: the individual hard-dives of employees.

By going digital, businesses unlock these pockets of knowledge stored in spreadsheets and in people’s heads and allow them to be applied via algorithms and machine learning.

Video streaming services have a large data advantage compared to their DVD-based competitors

By bringing together this data and enabling a platform for pricing and CPQ (configure, price, quote), you harness the power of that data and foster collaboration across the enterprise to make better decisions on pricing and profitability faster. I call this moving from a potential to a kinetic business.

Going digital and kinetic enables organizations to accomplish several necessary factors that will give them a competitive edge in marketplaces that are fluid, often volatile, and in a constant shift.

  1. Increased speed and agility. Organizations should have the ability to make changes easily and quickly. With the help of a dynamic pricing engine, they should be able to respond in real time to changes in competition, cost, strategy or other indicators without any manual intervention.
  2. Increased efficiency. Organizations should expect reduced cycle times and manual touches through process automation. The right solution can reduce cycle times – in my experience, I’ve seen reduction cycle times by 90% and 30% or more. This ability to respond faster to customers results in an increase in win rates, which has been proven in several studies.
  3. Enablement of machine learning and AI. Businesses in today’s digital world need to segment customers and products and recommend prices and products into the commerce experience to increase order and deal sizes and profitability.
  4. Empower the sales organization with the right data. Sales teams need the decision support and confidence to understand and ask for the price the machines and people are prescribing.

With the above, organizations are seeing real impact and results. Many studies have been done on the topic of optimizing pricing and its impacts on profitability by McKinsey, Deloitte, AMR, Gartner, et al.  The consensus is that you get between 0.5% and 4% of sales in pure profit.

Now, let’s analyze the numbers and consider the impact that the 0.5% to 4% of sales has on your profitability. Most studies show that a 1% improvement in price across thousands of companies results in a 9% to 11% improvement in profitability. We are talking about the potential of 4.5% to 36% or more improvement in profitability, so the stakes are high, especially when you consider the flip-side: If you get it wrong, you can have the opposite impact. Is that something you should be leaving to a spreadsheet someone developed five years ago that no one really understands?

I am still surprised to still see many industry-leading companies that have this opportunity locked away, not enabling the move to a kinetic business. The ones that do are establishing a major competitive advantage because they are enabling agility in the market, which, when used with the right strategy, can’t be overcome except by a superior strategy or more spending, much as a ball dropped reaches terminal velocity and another ball dropped after the same mass will never catch up with it.

The good news is that only about 10% of companies have invested in the people, process and systems to move the needle on this, so it’s not too late. But the first mover advantage is real and can result in a shift in market leadership if the number two or number three players invest in the technology and gain the advantage in the market. Just ask the people that worked at Sears.

About the author: Gabriel Smith is the Chief Evangelist and Vice President of Innovation at Pricefx and has 19 years of experience in quote to cash, CPQ, pricing, promotions, consulting, product management, sales, and general management.

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