BrazilAI can transform pricing strategy for promotions and markdowns
In the retail industry, artificial intelligence (AI) can play a major role in helping retailers understand optimal pricing strategies, according to analysis from Metyis experts Arshiya Nagi, Arpit Gupta and Guillermo Tovar.
Dynamic pricing has always been a challenge for the fashion retail sector, especially during critical sales periods. It is incredibly difficult to take all the necessary factors into consideration, including gross margins, inventory levels, and market dynamics.
Meanwhile, changing consumer presences and production variables may impact longer term pricing, meaning that retailers continuously seek to optimize their markdowns and markups.
Put simply, markdowns (or markups) are permanent changes to the prices of products. That is similar, but distinct from a promotion, which is a temporary price change that aims to generate urgency and boost sales in the short term.
So far, 2024 has seen a continuation of the unstable market conditions that have hung like a dark cloud over the world economy in recent years. That includes inflation, escalating trade tensions, and supply chain disruptions, all of which contribute to unpredictable shifts in the ways consumers spend their money.
Responding to these challenges, retailers are increasingly turning to intelligent machines – such as AI – for deeper insights and guidance on dynamic pricing. “AI tools have the potential to boost pricing in a wide range of industries around the world, and the retail industry is no exception,” said Arshiya Nagi director at Metyis.
Examples of use cases
Research from Metyis has identified five key areas in markdown optimization that retailers should consider when adopting AI tools:
Calculating price elasticities with the help of AI, which allows retailers to anticipate different scenarios and decide on optimal pricing. This works by measuring how clients react to changes in prices using tools that analyze products.
Predicting demand in all possible scenarios, or in other words, using AI models to calculate possible future demand for particular products. This works by analyzing a wide range of factors, including seasonal demand and baseline demand, which can allow retailers to make strategic decisions on markdowns.
Capturing stock flows using real-time data and sophisticated analytics, which can help companies to better understand inventory flows. This helps retailers take advantage of trends and patterns in their inventory that are overlooked by human analysis.
Finding optimal discounts, a process that takes a wide range of factors into consideration, including initial cost, sales velocity, inventory levels, and predicted demand. AI tools are able to recommend the most profitable discount for specific items, which boosts margins and cuts back on leftover stock.
Measuring the impact of sales ‘after the fact’ by inputting data into the AI model so that it can generate the next iteration of the solution. This is the essence of machine learning – constantly reanalyzing a model’s own output and making minor corrections. According to Metyis, this can lead to up to a 4% boost to gross margins in some retail areas.
Beyond sales excellence
Besides achieving greater sales, using AI to optimize prices allows retailers to reduce excess stock, which can help to contribute to sustainability goals. Putting eco-conscious values forward has become a necessity in retail, especially in today's market, where ethical and environmental considerations are taking center stage.
But despite the clear benefits, there are also challenges to adopting AI. For example, companies might face challenges in choosing the right AI model or in choosing a suitable services vendor. There are also big costs involved with integrating AI, including updating systems and retraining staff.
“The integration of advanced AI models into retail operations marks a significant evolution in the fashion industry,” commented Nagi . “This shift is particularly impactful in the realm of markdown optimization, a critical area for fashion retailers seeking to enhance seasonal sales performance and maximizing profits while minimizing waste and reducing redundancies.”
The AI boom
AI tools are quickly becoming a necessity (rather than merely an option) in many different industries around the world. Just like in other industries, retail companies will increasingly see adopting AI tools as an imperative in order to keep up with the competition.
A previous study showed that – overall and across a wide range of industries – AI could add up to $4.4 trillion in global productivity annually. However, there is also some concern from business leaders over impending regulations (like the EU AI Act), which are very likely to change the way they can use AI, a factor that has led to some organizations holding off on AI – at least for now.
