How companies use AI to set prices

FEW AMERICAN business tactics are as peculiar in a freewheeling capitalist society as the manufacturer’s suggested retail price. P.H. Hanes, founder of the textile mill that would eventually become HanesBrands, came up with it in the 1920s. That allowed him to use adverts in publications across America to deter distributors from gouging buyers of his knitted under garments. Even today many American shopkeepers hew to manufacturers’ recommended prices, as much as they would love to raise them to offset the inflationary pressures on their other costs. A growing number, though, resort to more sophisticated pricing techniques.A seminal study from 2010 by McKinsey, a consultancy, estimated that raising prices by 1% without losing sales can boost operating profits by 8.7%, on average. Getting this right can be tricky. Set prices too high and you risk losing customers; set them too low and you leave money on the table. Retailers have historically used rules of thumb, such as adding a fixed margin on top of costs or matching what competitors charge. As energy, labour and other inputs go through the roof, they can no longer afford to treat pricing as an afterthought.