How Can CIOs Help Their Companies Use Algorithms To Set Prices?

by drjim on August 8, 2018

Algorithms represent the next step forward in dynamic pricing

Algorithms represent the next step forward in dynamic pricing

Image Credit: x6e38

The reason that the IT department exists is to provide assistance to the rest of the company. A great deal of this assistance consists of background tasks such as keeping the email system running, setting up new servers, and protecting the company’s networks from hackers. However, there is another side to what the IT department may be called on to do and that has to do with making the company more competitive. It turns out that the company realizes the importance of information technology and knows that it needs the IT department’s help when it comes to setting prices for its products.

The Arrival Of Price Setting Algorithms

If we were to take a look at what economics textbooks tell us about setting the price for a product, we’d discover that they say that open competition between one or more firms that are selling basically the same product will tend to push product prices lower. Clearly this is something that your company would prefer to avoid. One way to attempt to prevent a downward spiral on your prices is to have the person with the CIO job create a pricing algorithm. If the company can dynamically adjust their prices, perhaps several times a day, then they can maximize their revenue while not driving away customers.

The IT department is being asked to help the rest of the company with setting prices for their products. The goal is for the IT department to use as much information as can be collected to create algorithms that can be used to calculate the price that the company’s products should be sold at. The algorithms that the IT department can create will determine the optimal price sometimes dozens of times a day. As the algorithms get better at predicting what competitors are charging and what consumers are willing to pay, they will change the prices and in certain cases may even increase prices.

Using algorithms to set prices is not something new. In a number of industries, retail and wholesale specifically, algorithms have been used as dynamic pricing software to allow their prices to change as conditions change. This type of pricing has been used to set prices for products that have a lot of turnover such as televisions and airline tickets. These older algorithms used simple rules such as weather conditions and the current price of a competitors good to set prices. The goal of the software was to create prices that would always be lower than the company’s competition.

How IT Can Help With Price Setting Algorithms

The new pricing algorithms that the person with the CIO job is being asked to create are more sophisticated than the older algorithms. The inputs that the new algorithms will use include lots of the company’s historical data along with available real-time data. The goal of the new algorithms is to attempt to predict the reactions of both competitors and customers to a price change. The new pricing algorithms will be required to create prices under different scenarios. The algorithms will be designed to meet a specific company goal – more often than not something like boosting product sales. The hope is that the new algorithms will be able to use data to provide an insight into how a market is performing. As time goes on the algorithms should be able to update their operation based on market experience.

The new pricing algorithm software is going to have to be focused on modeling how a company’s consumers behave. The ultimate goal of the software is to benefit both the consumers and the company at the same time. Over time, the algorithms will learn when raising the price of a product will drive away customers. It will also learn when to lower prices in order to entice price-sensitive customers to make a purchase. The goal is for the company to be able to make more money from customers who are not price sensitive and to present a lower price to those customers who are price sensitive.

The new class of pricing algorithms are starting to use artificial intelligence in order to adapt to changing market conditions. This is becoming more and more important for those companies in the retail industry where the product margins are traditionally quite low. With the arrival of competition from online retailers, these companies are starting to suffer. Companies that have fast-moving goods, frequent price changes and thin margins—such as the grocery, electronics and gasoline markets— are the ones who are best suited to having their IT departments create pricing algorithms for them. Their motivation comes from the fact that they need the extra pennies of margin that these algorithms can provide.

What All Of This Means For You

As your company’s CIO, you have a number of different challenges that you need to find a way to deal with. There are, of course, all of the standard IT tasks that an IT department is responsible for handling. However, in addition to this work there are also the special requests from the rest of the company. These special requests can include helping the company determine what price they want to sell their products at.

One solution to this challenge is to have the IT department use its resources to create pricing algorithms that the company can use to dynamically set prices for its products. Using algorithms to set prices has been done before in order to sell televisions and airline tickets. Older algorithms used a limited set of inputs to determine what the new price should be. New algorithms attempt to predict the reactions of customers to the new prices. Over time the new algorithms will adjust to how customers actually buy the product. The use of artificial intelligence will allow the algorithms to create frequent price changes to match fast moving products.

How a company chooses to price its products can have a dramatic impact on the firm’s bottom line. In today’s world of constantly changing data and aggressive online competition, firms need to turn to their IT department in order to get help in creating customized pricing algorithms that will match both their product and their market. The IT department is uniquely set up to provide the company with what it needs because of our access to all of the company’s historical and real-time data. This need provides both the CIO and the IT department with an opportunity to shine in the eyes of the rest of the company.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Department Leadership Skills™

Question For You: Once the IT department has created a pricing algorithm for the company to use, what would be the best way to go about testing this algorithm?

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