opinion

Artificially Intelligent Pricing Is Here

Thierry Arrondo

There’s a lot of talk these days about the dangers of artificial intelligence (AI).

Elon Musk and Stephen Hawking fear that AI will eventually destroy us and have written an open letter to call for rules to govern AI. You can sign it, too (I did).

Pricing is one of those things that is simply beyond human intelligence. Airline, hospitality and e-commerce leaders have known this for years. That’s why AI is in charge of their pricing.

The kind of AI they are talking about is military. It’s related to future artificial general Intelligence, or AGI.

AGI shows up in movies as the “The Terminator” or HAL in “2001: A Space Odyssey” or the girl in “Ex Machina.” It doesn’t exist yet. It’s science fiction. No one knows when, or if, it will exist. We’re not sure what the consequences will be so we are playing out imagined scenarios in our books, TV shows and movies.

Artificial narrow intelligence, however, is here. It’s all around us.

The definition of AI is: “a system that perceives its environment and takes actions that maximize its chances of success.” It powers the self-driving car that drives better than any human. It took the form of Watson to beat the best players on the game show “Jeopardy.”

IBM’s Deep Blue beat the best chess player in 1997. What did that IBM machine do for its next trick? United Airlines bought it and put it to work pricing airline seats. Today AI drives Google’s search, Netflix’s recommendations and the pricing decisions of every major e-commerce retailer (e.g.: Amazon) and hotel chain (e.g.: Marriott) and airline (e.g.: United, of course).

The advantage of AI is simple. It does certain things much better than humans. It analyzes and acts on hundreds of millions of interactions to give each new visitor the best price for him or her. The best price is the one that generates the most revenue.

In contrast, a human approach to pricing is the following: 1. Look at what everyone else is doing. 2. (maybe) A/B split test with major groups of people (e.g.: people who live in the U.S.). 3. Offer a few discounts here and there.

But where is the feedback loop? How could a human brain possibly calculate the impact on revenue (conversion and lifetime value) of each pricing decision? And how could it take into account all of the interacting factors at play each time there is a new visitor?

The costs of not using AI pricing are high. If you show the wrong price the visitor won’t buy … or will spend less than he would have. Pricing is one of those things that is simply beyond human intelligence. Airline, hospitality and e-commerce leaders have known this for years. That’s why AI is in charge of their pricing.

Will AGI arrive? Some really smart people like Kevin Kelley, co-founder of Wired, think it’s a myth that a computer can gain consciousness.

But artificial narrow intelligence is already here and it’s a powerful tool that too many companies haven’t been able to access. At Vendo we’re bringing AI to companies that have been missing out on the revolution.

What are your thoughts on AI? Do you welcome or fear AGI? How is ANI present in your life?

Thierry is the managing director of Vendo. Vendo develops artificial intelligence systems that allow merchants to dynamically set prices for each unique shopper.

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