The title of the post was created by ChatGPT 4.0, a Generative AI Large Language Model (LLM) . In fact, it wrote most of this post.
Recent (August 2023) articles, such as “America’s biggest brands rethink price hikes in disinflation era” discuss uncertainty in pricing, with inflation cooling and predictions of a recession by some.
So we asked ChatGPT what it thought about how machine learning and AI can help companies set prices when inflation has recently been high, is slowing down, and with a possible recession coming.
Here is its response. A pretty good one at that.
Machine Learning and AI: Navigating Pricing Strategies in a Post-Inflation Era
High inflation, while a challenge for many businesses, also presents an opportunity for companies equipped with the right tools and strategies. As inflation slows down and concerns of a recession emerge, pricing decisions become even more crucial. Enter machine learning (ML) and artificial intelligence (AI), which offer transformative solutions in price optimization and elasticity modeling, especially in uncertain economic times.
- Adapting to Rapid Market Changes
With ML algorithms, companies can process vast amounts of data in real-time, providing insights into current market dynamics and consumer sentiment. This is vital during periods of decelerating inflation, where market conditions can change quickly. AI tools, leveraging big data, can provide dynamic pricing recommendations, allowing companies to adjust prices in real-time in response to supply and demand shifts.
- Predicting Consumer Behavior
Understanding how consumers react to price changes is more complex during uncertain times. Will the consumer base respond favorably to a price reduction, or might it be perceived as a sign of reduced quality or desperation? Using predictive modeling, businesses can simulate various pricing scenarios, predicting consumer responses based on historical data and current market trends. This enables proactive rather than reactive pricing decisions.
- Incorporating External Factors
Machine learning models, especially those based on deep learning, are particularly adept at handling vast and varied datasets. During periods of economic downturn, external factors like unemployment rates, stock market performance, or global economic indicators can profoundly influence consumer spending habits. ML and AI can incorporate these variables into predictive models, ensuring that pricing strategies align with the broader economic context.
- Optimizing Promotions and Discounts
Offering discounts or promotions during slow economic phases can boost sales. However, there’s a fine line between driving sales and compromising profit margins. ML algorithms can help businesses strike the right balance, analyzing which products to discount, by how much, and for how long, ensuring both profitability and increased consumer engagement.
- Enhancing Price Elasticity Modeling
Price elasticity, the measure of how demand for a product changes in response to price alterations, can be highly volatile during periods of economic uncertainty. Traditional models might not capture these nuances. Advanced AI models, by contrast, can refine elasticity estimates, factoring in recent shifts in consumer behavior due to inflationary pressures, and thereby recommend price adjustments that maximize revenue.
While high inflation followed by a potential recession poses challenges, it also offers opportunities for businesses to reimagine their pricing strategies. By harnessing the power of machine learning and AI, companies can navigate these uncertain waters with data-driven insights, ensuring they remain agile, responsive, and profitable, no matter the economic climate.
So we offer the above from an AI assistant as good advice.
Of course an AI can give you advice (some of it good, some of it bad), but then it becomes time for action. And in fact, machine learning and predictive analytics comes into play in each of these courses of action, too.
Here are some case studies as examples:
- Menu Price Optimization for a Quick Serve Restaurant
- Optimizing Gasoline Prices
- Better Quantification of Promotional ROI
- Building In-house Price and Promotion Modeling Capabilities
- Commodity Prices, Producer Profitability, and Spending
- Pricing Segmentation using a Demand Signal Repository
- Recommending Discount Levels for B2B Customers
Of course pricing is impactful across the entire supply chain, as described in this post:
And as for incorporating external factors, beware of the Perils of Third Party Data in Forecasting.
While analytical tools for executing profitable pricing go back decades, the technological developments in recent years makes data-driven (and machine-driven) decisions much more powerful. And in fact, those who don’t use them will fall behind.
p.s. the image for this post was also generated by an AI called DALL-E. Not great, but the technology is advancing.