An AI For Every Price: How Artificial Intelligence Is Rethinking Pricing
What’s a day in a life for a Consumer Packaged Goods (CPG) company?
A lot can be optimized throughout the production process to increase the revenue of a CPG company, but optimizing profit? That is arguably purely a pricing game.
A CPG company’s pricing and trade promotion strategy is hatched between the Revenue Management Department and Sales and Marketing. Promotional strategies are typically a combination of a CPG company’s “backwards-looking” historical data, combined with the teams’ “institutional” business knowledge. This process has evolved over the years, from a guessing game, to numbers game. Monthly Linear Regressions are one way to predict price elasticity, and to calculate the expected Sales based on the price. Another popular approach is to calculate the price elasticity per product, per retailer, per day. Both approaches have demonstrated reductions in prediction errors by up to 80% (not bad!) — but are generally time-consuming, manually-intensive, and Excel-based. (Ouch!)
But now, startups are using machine learning and artificial intelligence to eliminate this pain.
Meet Wise Athena, an intelligent agent that uses Machine Learning and Deep Learning techniques customized for CPGs and based on econometric science, to enable CPGs to make the best pricing and trade promotion decisions. WiseAthena was part of the 2017 cohort in the SAP.iO Berlin Foundry, Powered by Techstars Accelerator.
With Wise Athena, a CPG company benefits from automatic selection of the data features that best describe the behavior of their products, even in relation to each other. Wise Athena then computes into the model, cannibalization and cross-elasticity of the CPG company’s products automatically.
The happy news doesn’t end here. Wise Athena retrains their models every month, increasing prediction accuracy up to 94%. CPG companies can optimize their whole portfolio, with every retailer during every cycle. Despite having trillions of possible price combinations (or as Wise Athena CEO, Alfonso Vazquez, likes to say: “there are more price combinations every month than there are grains of sand in the Sahara Desert”), they can now find the price combinations that maximize their sales or their margins within one Product as a Service. This improved Pricing Strategy has enabled Wise Athena customers to increase Margins between 3% and up to 12% per year.
Here’s the “unplugged” conversation with the brains behind the pricing AI: Alfonso Vazquez (CEO), Ricardo Flores (Head of Business Development), and Octavio Hinojosa (Head of Sales).
Q. What was your biggest goal for Wise Athena in 2017?
WA Team: Sometimes you feel like you have something very interesting in your hands and you’re selling that thing but still you’re not 100% certain if this thing is ready for the big leagues.
We joined the SAP.iO Foundry, Powered By Techstars Accelerator because we wanted to gain deeper understanding of the market.
We had huge access to SAP’s account executives, CPG product experts and SAP customers. From a business standpoint: we were able to validate our value proposition.
From a product standpoint: SAP experts in EU and the U.S. validated our product and business assumptions. We were able to confirm that Wise Athena, with its pricing model, will be able to deliver a lot of value to CPGs. Also, we were able to home in our sales pitch, sales strategy and validate the solution with major accounts like Beiersdorf and Heinz.
Within the program’s 13-weeks, we doubled our cash flow.
Q. That’s truly incredible! How did it happen?
WA Team: We got some major tips. We found out that our method of charging customers wasn’t optimal. The SAP sales experts, mentors, and VCs told us that our current strategy generated more worries for our customers and more work for ourselves. Initially, we were charging on monthly basis. They told us: this kind of product is simply too valuable for that. So that triangulation of advice gave us the encouragement revamp our whole model.
Q. How has Wise Athena’s growth changed?
WA Team: The biggest change for us was the speed of execution. To put it mildly, the execution of our vision has leapfrogged. When we met with Hala Zeine, SVP and Chief Business Development Officer -SAP, for example — she really extended the possibility of our econometric AI into other sectors like Pharma and manufacturing. Also, Franck Cohen, Chief Commercial Officer -SAP, helped us expand our vision to governments!
Q. What is your vision for Wise Athena?
WA Team: We are going to be the world-leading experts of AI-powered econometrics. We will ensure CPG products sell at the best possible price, every single time.
We see a lot of areas where econometrics can be applied and not only in pricing but also in macroeconomics. For example, we can apply our algorithms to optimize the GDP and employment rates for a country! for instance, instead of trade promotions for CPGs, we can use our AI to make tax reductions suggestions to increase GDPs.
We also envision Wise Athena as the first Artificial Intelligence Agent in the boards of companies.
We are talking to the SAP Leonardo team and all the account executives agree, there is a huge need for an Intelligent Agent on the board. A “smart” Intelligent Agent and not a “SIRI”. One that tells you what you should worry about in your numbers, what is the forecast that you should be looking for…etc. Every [executive] board has 10,000 dashboards that they can look at every month and there’s simply not enough time.
Wise Athena can look at those dashboards for them and tell them what worries her — the Wise Athena “Agent” — and what she’s concerned about and what she’s happy about. Having the first non-organic board member is part of our new and improved vision.
Q. What are your next steps?
WA Team: We are now focusing on the Mexican and US markets. For Mexico, we were able to build a team for lead generation and outbound marketing. We are also in the process of hiring our key account manager in the Mexican market. In June, we’ll be launching our sales force in the US. We’re hiring three sales people. So our main focus is to consolidate Mexico and kick off the U.S.
Q. The Wise Athena Family is growing! How exciting!
WA Team: We are becoming market leaders because of our relationship with SAP. Now we’re reaching the next steps expanding to Mexico and the U.S. and building strong connections with CPG research institutes around the globe. We want to spread the word that they now a have a CPG solution…whereas before they only had a problem.
Q. How will Wise Athena maintain a competitive edge?
WA Team: We have now analyzed millions and millions of pricing time series. This has increased the intelligence of Wise Athena’s pricing and trade promotions to a point where any newcomer would find it very hard to reach that level of sophistication and intelligence that Athena offers to the market.
The interesting thing about gaining ground in the CPG promotion optimization space is that we are beginning to see network effects. For example, one of our clients is a sausage producer and another is a condiment company, and because we are in touch with both of them every month, they asked us to connect them with each other for a joined hotdog and ketchup promotion.
Q. How can companies maintain a competitive advantage if they both have Wise Athena? Or rather how can Wise Athena still provide value to two competing companies?
WA Team: Let me ask you…what if one company has SAP and another competing company has SAP? How do you plan to mitigate that — they both have SAP! There’s no issue, right? We are providing a cognitive tool. At the end of the day, it is still a tool — at least for the time being.
The way that we see it: at the moment it’s either you have SAP or you’re in big trouble — so it’s the same thing with Wise Athena, either you have it or you’re one step behind your competition. It’s a tool that is becoming necessary for today’s business and it really helps optimize costs and trade promotions.
One last question: What was the highlight of the SAP.iO Foundry, Powered by Techstars Accelerator experience?
WA Team: The people! The people from SAP, Techstars, the other startups, the mentors, meeting so many amazing souls. The people that were there…that was the experience of a lifetime!
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