By applying artificial intelligence (AI) to strategies such as dynamic pricing, e-commerce merchants have an opportunity to maximize revenue.
Every merchant would love to know the exact price to get their customer to buy their product, service, or subscription. It would certainly make sales and marketing strategies much easier to execute. By applying artificial intelligence (AI) to strategies such as dynamic pricing, e-commerce merchants have an opportunity to get very close to making this a reality.
What is AI-Powered Pricing?
AI-powered pricing is not a new concept. It has been in use since late 2016, building on the lengthy history of artificial intelligence. AI pricing models have greatly evolved—and continue to evolve with machine learning as it tracks and analyzes increasing data.
Artificial intelligence is being increasingly used to automate and improve dynamic pricing strategies. Hotels and airlines have been using it for decades to shift pricing based on peak and off-peak times and demand.
The goal is to provide the optimal price that is attractive to each customer or customer segment in order to maximize the merchant’s revenue. Without a doubt, customers will pay a different price for the same product or service, given the opportunity. Some are enticed by a lower price, while others make purchases based on factors other than price alone because not every consumer prefers the “best deal”.
How Does AI-Powered Dynamic Pricing Work?
With artificial intelligence, machine learning algorithms can be trained on data gathered from millions of transactions over time to then intelligently predict the current optimal price for a product. Such predictions can then be automatically adjusted in-the-moment, allowing merchants to be responsive to customer and market conditions. It also helps to identify what prices will be most attractive to various customer segments.
In the context of payments processing, the AI model of pricing optimization uses historical information from visitors such as the hour of day, day of the week, language, browser, device, operating system, connection type, country, continent, and income. It also studies the visitor’s previous activity, such as, previous attempts, previous successful transactions, and time since the first visit. These data points are continually updated so the AI “machine” has the most accurate information available.
The AI pricing system Vendo uses, ARIA, learns daily. A total of 46 operating systems, 1054 browsers, eight devices, and 238 countries are used to train and adapt the model to new situations. We also use a control group to compare AI-powered results. This ensures we’re providing the best insight possible to our e-commerce merchants.
In addition, as a payment processor working with merchants across multiple countries, Vendo, specifically, has interactions with billions of shoppers across hundreds of thousands of products. This allows even greater learning and insights, similar to how Google optimizes search results by observing search trends and patterns among its users.
Dynamic pricing also allows the price to be tailored to each visit. When dynamic pricing is put into motion, a baseline reference price is defined; let’s use the example of $25 (USD). From that baseline price, different price points are created (-$10, -$5, +$0, +$5, +$10). Then, the model defines the probability of each price point to get the maximum earnings per click (EPC). Once this is done, the price point with the highest probability is picked and shown to the end user/visitor.
What’s really important for dynamic pricing to work optimally is to have access to, and the ability to collect, all of those key data points. The more information the machine has on those variables, the better it will be able to determine a price that maximizes a merchant’s revenue.
Smaller online merchants may not have this variety or amount of data available to them. This is one reason why they have been prevented from using dynamic pricing thus far, while larger e-commerce sites have moved forward with it. Fortunately, AI technology has improved to where companies like Vendo can easily support merchants of all sizes to access the benefits of AI-powered dynamic pricing and break that barrier to their revenue growth.
Key Benefits of AI-Powered Pricing
Online merchants are perfectly poised to benefit from AI-driven dynamic pricing. Globally, the biggest benefit is simply more revenue. However, there are key elements that comprise that outcome. Here are some facts to consider:
- Offering every end user the same price costs online merchants anywhere from 10-20% of revenue potential. The opposite is also true. AI pricing can generate 5–10% more revenue.
- Traditional pricing models, such as A/B testing, take considerable time and resources to conduct and implement. Dynamic pricing cuts down that process immensely.
- Dynamic pricing contributes to positive lifetime value (LTV) among customers. This is an integral key performance indicator (KPI) to track.
- Dynamic pricing can be particularly advantageous during different times of the year, such as Black Friday/Cyber Monday, December holiday shopping season, Valentine’s Day, etc.
One common question we get from clients is whether or not dynamic pricing ever causes online merchants to lose money. The short answer is “no”. During the exploration phase, when the system is reviewing and learning, there likely will be days when merchants lose revenue. However, once that learning phase is complete, the lift in revenue outweighs any losses experienced during that phase.
The Bottom Line
An unfortunate reality for online merchants is that many neglect a regular review of their pricing strategies. That is a game-changing opportunity. E-commerce merchants can thrive by optimizing revenue growth, whether by implementing AI-powered pricing or incorporating revenue growth tools, such as the ones we offer at Vendo.
Of course, it is ideal for merchants to use all of the revenue growth tools available to them. An AI-powered pricing strategy, which some of Vendo’s clients use, is an intelligent revenue growth tool to help support decision making and improve revenue and conversion.
In the coming year, dynamic pricing models that focus on discounts, instead of fixed prices, are on the horizon for AI-powered pricing. Payment processors, including Vendo, are already exploring and developing this model for e-commerce merchants interested in implementing cutting-edge strategies.
If you are interested in understanding whether AI-powered dynamic pricing can apply to your business, please connect with us to learn more.
Vendo offers comprehensive payment processing services to e-commerce merchants. Our innovative, AI-powered tools offer merchants simple, secure, and seamless payment solutions, along with expert customer support from integration to end-user concerns. Our expert team works 24/7 to shape your vision into reality. Contact us today and see how we can help your business thrive.