AI for Retail

CHAPTER 22AI for Pricing and Promotion

Current Roles, Processes, and Inefficiencies

Pricing strategies are core to your success as a retailer. These strategies vary from very simple markups to very complex optimization mechanisms.

First, let's discuss simple markups. Small independent grocers, which represent over 65% of the grocery stores in the US, usually veer toward this strategy. In these stores, the owner is the merchant and pricing department, so they do not have time for competitive intelligence and AI algorithms. They usually just rely on their distributors to provide all pricing (based on SRP, or suggested retail price). This is largely a fixed markup on top of COGS. They also provide information on promotions such as TPRs (temporary price reductions) that the retailer can sign up for or not.

In larger chains, they may have full pricing departments that are constantly collecting competitor pricing information either by their circulars, going into the store and observing prices, or looking online. They will model the full end‐to‐end supply chain costs to get a product on the shelf plus the COGS and ensure they do not go below that. This is typically called the break‐even point (BEP).

Some retailers price exactly at their BEP, which is setting the price equal to your business expenses. So if you sell 100,000,000 units a year, and the full operating costs of your business (labor, rent, electricity, etc.) is $10m, then each unit costs you about $0.10 in fixed costs that ...