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GUEST COMMENT How AI powers price optimisation to drive maximum profitability for FMCG

The UK customers have grown more cautious about spending on consumer goods since the news about Brexit went public. It has become yet another challenge for FMCG brands and brick-and-mortar retailers adding up to surging operational and commodity costs, inflation, and the rise of Amazon and similar global companies. Squeezed between weakening demand and soaring expenses, mature companies are testing the potential of artificial intelligence to optimize prices for changing product portfolios in order to increase profit and revenue without risking margin and sales.

Why is it crucial to set optimal prices?

The answer is: to retain customers, especially price sensitive ones. It is extremely hard to compete for the hearts of buyers in the Brexit-affected market. Bear in mind that the market is also being disrupted by multiple click-and-mortar and digitally native companies and ruled by Google search algorithms which direct the attention of consumers both offline and online. Some UK-based businesses which were extremely profitable a few months ago are forced off the market by the capricious power of Google rankings cutting their conversion rates by nearly half for three months.

As the economic situation in the country is changing, FMCG mature retailers are looking for smaller product portfolios of high-margin items which they can sell at optimal prices. Companies are starting to recognize the power of the right prices which can help them keep generating revenue in the new reality. “I see pricing being a key feature of the entire sector through the balance of 2018 and in 2019,” noted Unilever Chief Financial Officer Graeme Pitkethly in an interview.

Kosmo, a European FMCG retailer with over 20 years of operations under the belt, has started using pricing as a major lever to increase sales and revenue. The company partnered with Competera, a retail price optimization provider, to help it come out of the hole of bottom-line prices.

“Today retailers and vendors have started using promos to stimulate financial performance,” commented Georgy Sheiko, CEO of the retailer. “This leads to cutting prices non-stop. However, everything has its limits. Now, we are faced with a question of how to satisfy the customer while keeping the prices beneficial for the business. To do so, I believe, we need to shift from price wars to predictive pricing.” As a result of cooperation, item sales and revenue grew by 15.9% and 8.1% respectively and gross profit (front) grew by +9.8% for one category as part of a market test.

What makes AI beneficial for pricing?

Artificial intelligence helps to enhance retail managers and increase revenue by boosting the efficiency of various areas of business, including pricing. Luckily, AI-driven software is becoming more sophisticated and accessible to a higher number of retail companies.

Very often, willing to boost sales of selected fast-moving high-margin products, companies choose to cut prices and launch promo campaigns for particular items. Meanwhile, retailers do not analyze their effect on other products on the shelf. Regular customers buy in bulk killing the current profit margins and future sales with one hit.

AI-enabled technology can be an option for retailers to save the day and keep them from ill-informed pricing decisions. In a nutshell, such software allows retailers to switch from SKU-based to portfolio-based pricing. It lets companies calculate optimal prices for the whole product portfolio and know exactly how to change the prices of some products to boost the sales of other items. In contrast, retailers which stick to SKU-based pricing manipulate prices for particular products on the shelf without analyzing the effect of such pricing moves on other items and very often cut their sales.

With AI, FMCG retail teams can forecast sales and demand for an upcoming week, predict the effect of every pricing decision, test-drive various pricing and promotional scenarios, set data-based as opposed to intuition-based prices by analyzing unprecedented amounts of data and considering hundreds of pricing and non-pricing factors like price elasticity, customer behaviour, business goals, weather, competitive prices and sales history. Such technology allows managers to balance prices for their currently changing product portfolios and, as a result, attract more customers.

Ultimately, competition in the UK FMCG market is toughening, peppered with increasing costs, a falling pound, the strengthening influence of Amazon and the likes, and the growing expectations of customers. Very often, businesses are forced to adjust their product portfolios and optimize prices accordingly in order to build the right price perception and entice more customers. Leading retailers already use AI-powered solutions which allow for making smart data-driven pricing decisions for the whole assortment and, therefore, get ahead of the market.

Author: Simon Hall, chief executive officer, 5XThinking

Imagine: Fotolia

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