Sep 305 min read

AI-Driven Pricing Revolution in the CPG Sector

The Consumer Packaged Goods (CPG) industry has historically depended on broad pricing strategies frequently impacted by competitive prices, market trends, and historical sales data. On the other hand, CPG companies' approach to pricing is changing due to the rise of artificial intelligence (AI), which makes more dynamic, tailored, and data-driven tactics possible. This movement is improving consumer connections for CPG companies and altering pricing structures. It also produces a plethora of data that can be used to enhance pricing decisions.

Figure 1: Revenue Benefit from an AI Transformation (In the CPG Industry)

AI is enabling more dynamic, data-driven approaches to pricing, which is dramatically changing the game for Consumer Packaged Goods (CPG). Some important market data and observations are as follows:

Profit and Cost Impact: An NVIDIA poll found that 72% of merchants saw lower operating expenses and 69% of retailers reported higher annual sales as a result of implementing AI.
Dynamic Pricing: Artificial intelligence algorithms use competition pricing, demand forecasting, product lifecycle analysis, and historical sales data to optimize pricing. In doing so, CPG businesses can increase market share, earnings, and sales.
Revenue Growth: Compared to organizations concentrating on other areas, large companies that adopted AI-driven price changes saw a 70% increase in revenue growth of more than $100 million.
Market Growth: From 2022 to 2031, the worldwide consumer packaged goods (CPG) market is projected to develop at a Compound Annual Growth Rate (CAGR) of 5.1%, reaching $18.94 trillion.
Consumer Behavior: AI aids in the comprehension and forecasting of consumer behavior, enabling more individualized and successful pricing plans.

Figure 2: Example of AI in the CPG Industry (Source: Dragonfly AI)

The Shift to Data-Driven Pricing

Artificial intelligence (AI)-driven pricing techniques use a plethora of data, such as current market conditions, customer behavior, and rivalry, to make profitable pricing decisions. CPG companies can now modify prices in response to changes in demand, competition actions, and even specific customer preferences thanks to the transition from traditional, static pricing methods to dynamic pricing models. An AI system, for instance, might evaluate previous sales data and forecast, while accounting for seasonality, geographical preferences, and consumer purchase trends, the ideal pricing point for the launch of a new product.

Figure 3: Promising Applications and Roadblocks in Retail & CPG Value Chain (Source: Everest Group)

Direct Consumer Connections and Data Availability

With AI, firms can now communicate directly with consumers, which is one of the biggest ways pricing in the CPG industry is changing. CPG businesses now have direct means for connecting and communicating with their consumers because to the growth of social media, smartphone apps, and e-commerce platforms. Data about product preferences, shopping patterns, and even input on pricing are generated by these exchanges.

Loyalty programs and direct-to-consumer (D2C) sales channels, for example, offer comprehensive information into the purchasing behaviors of consumers, including how frequently they buy particular products, when they are most likely to buy, and how they react to promotions and price changes. Businesses are able to customize their pricing strategies to target individual customers or particular consumer segments by using AI to evaluate this data and find patterns and trends.

Furthermore, real-time data on product usage and consumption trends is being made available to CPG businesses through the use of smart packaging and IoT devices. For instance, when a customer runs out of a product, linked devices can detect it and send out tailored offers or pricing modifications to entice them to buy more. Thanks to AI, this level of personalization—which was previously unachievable—is now becoming possible.

Figure 4: Example of Wipro’s Promax approach to collaborative data modeling (Source: Wipro)

AI-Powered Consumer Insights

The way CPG firms see their clients is likewise being revolutionized by AI's capacity to process and analyze massive volumes of consumer data. AI can generate comprehensive consumer profiles by combining information from several sources, including past purchases, social media sentiment, and online interactions. The genuine value that customers place on things can then be reflected in pricing strategies that are more accurate thanks to these profiles.

AI, for instance, can divide up customers into groups according to how sensitive they are to pricing, which enables businesses to target those customers with individualized discounts or offers. Furthermore, AI can forecast future demand for certain items and spot trends in customer preferences, allowing CPG companies to make proactive price adjustments as opposed to reactive ones.

Enhancing Agility and Responsiveness

Figure 5: CPG Industries are Underinvesting in Pricing Tools (Source: BCG)

AI integration into pricing strategies also improves CPG firms' responsiveness and agility. Conventional pricing methods sometimes led to sluggish reactions to market shifts since they demanded protracted approval procedures and in-depth market research. AI-powered pricing systems, on the other hand, can respond instantly to changes in raw material costs, competitor activity, and demand fluctuations. Because of their agility, CPG businesses can stay competitive in a market that is changing quickly.

Furthermore, AI is capable of continuously monitoring and modifying pricing methods in response to real-time data, guaranteeing that prices stay optimal across various channels and geographical areas. CPG businesses can increase revenue and profitability while preserving a competitive advantage by using this dynamic pricing strategy.

Figure 6: AI-Driven Revenue Management (Souce: BCG)

Figure 7: CPG Industry Trends

The Future of AI in CPG Pricing

Figure 8: 2024 Strategy Focus: Price, Volume, or Product Mix?

The CPG industry's pricing tactics will be increasingly impacted by AI as it develops. Future advancements might include more complex AI systems that can forecast customer behavior even more precisely in addition to cutting-edge instruments for real-time pricing optimization across numerous channels. The competitive landscape will also change as more CPG companies implement AI-driven pricing strategies; those who do not may find themselves at a disadvantage.

In summary, artificial intelligence is not only changing the way CPG companies handle pricing, but it is completely changing the field of price strategy. Artificial intelligence (AI) enables CPG firms to create more dynamic, personalized, and responsive pricing strategies by facilitating direct relationships with consumers and offering unprecedented access to data. Technology will only play a bigger part in determining the direction the CPG industry takes as it develops.

AI-Driven Pricing Revolution in the CPG Sector

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