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How AI can delight customers, Increase razor-thin margins

Daisy CEO Gary Saarenvirta admits that while AI may seem overhyped, it's ready to drive results as it's a powerful technology that gives consumers what they want.

Photo by istock.com

November 12, 2019

By Gary Saarenvirta, Daisy CEO and founder

It's easy to visualize the impact of artificial intelligence when a drone is dropping off a package at a customer's front door or a mechanical arm removes boxes of a pallet in a warehouse.

While this type of AI attracts the spotlight, there are many innovative ways the technology can transform their businesses.

These opportunities get overlooked because they involve AI that lacks the sizzle seen in the headlines, and touches on back-office operations that may seem less interesting. But they deserve more attention because when deployed as a strategic part of a retailer's merchandising operations, AI can help retailers establish a competitive edge with better pricing mix, promotional product mix, and demand forecasting/inventory allocation.

At first, retailers might be cautious about applying AI. Selecting the product combinations to promote and discounts to offer is more complex than automating manual tasks. It involves higher-order thinking that we assume only humans can do.

That may be true if "AI" involves machine learning, which requires humans to continue playing a role in "training" an algorithm and helping ensure it doesn't make mistakes. Retailers that have used (and been disappointed by) predictive analytics, haven't been using AI. Predictive analytics mostly relies on the use of historical data — assuming the outcome of promotions and discounts in the past will help forecast what will happen in the future.

AI based on reinforcement learning overcomes these limitations. It works autonomously without human intervention and it can simulate the future outcomes based on different promotional and price mixes.

An experienced category manager may determine that based on historical sales, a discount on haddock will have a positive impact on its sales volume. What might get missed, though, is the impact of the discount on cod, tilapia and other fish that weren't put on sale, or as important, the impact — or ripple effect — of the discount on related items such as lemons, potatoes, and asparagus to prepare a fish dinner.

AI based on reinforcement learning augment human decision-making, because it provides merchandise planners and marketers promotional product and price mix recommendations that will grow sales, margins, transactions and/or net profits. The recommendations are based on billions of iterations of different combinations which is otherwise far beyond human capability. This ability to see far more than human merchants can is the reason for improved results.  Better information equals better decisions.  

The role of the merchant in a post-AI world will change. The merchant becomes the “lion tamer” so to speak, providing the overall business strategy and business constraints that the AI must live within.  The merchant will oversee the AI recommended decisions overriding the system when last minute exceptions due to product availability, vendor funding changes or competitive impacts occur.   Merchants and their analyst teams will not have to execute as much data entry related to planning as the AI will take care of this as well.  This labor savings allows retail staff to be re-deployed to more valuable activities.

Shopping behavior can be influenced by many things, from the weather to holidays, socioeconomics and the demographics of your customers. Decisions once based on gut instinct are becoming so complex and nuanced that only true AI can analyze the necessary information at scale.

Applying AI to product promotions, pricing and demand forecasting also contribute directly to personalization and overall improved customer experiences. Regardless of the buyer persona or the products purchased, consumers want the best prices and products that meet their lifestyles.

AI may seem over hyped, but it's ready to drive results today. AI is a powerful technology that gives consumers what they want — and delivers higher sales and profits to retailers.