Algorithms Won’t Solve All Your Pricing Problems

HBR IdeaCast

Harvard Business Review

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4.3 • 1.9K Ratings

🗓️ 19 October 2021

⏱️ 27 minutes

🔗️ Recording | iTunes | RSS

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Summary

Marco Bertini, marketing professor at Esade Business School, says more and more companies are turning to pricing algorithms to maximize profits. But many are unaware of a big downside. The constant price shifts can hurt the perception of the brand and its products. He warns that overreliance on artificial intelligence and machine learning without considering human psychology can cause serious damage to the customer relationship. And he outlines steps managers should take, including implementing guardrails, overrides, and better communication tactics. With London Business School professor Oded Koenigsberg, Bertini wrote the HBR article "The Pitfalls of Pricing Algorithms."

Transcript

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0:00.0	So you got the job. Now what? Join me, Eleni Mata, on HBR's new original podcast, New
0:08.1	Here, the Young Professionals Guide to Work, and how to make it work for you. Listen for
0:13.8	free wherever you get your podcasts. Just search New Here. See you there!
0:30.0	Welcome to the HBR Idea Cast from Harvard Business Review. I'm Kurt Nickish. When I was a teenager
0:49.9	on a sports team, our team bus stopped at a McDonald's restaurant. Waiting in line, we
0:55.2	noticed that the board that showed the prices for the French fries and hamburgers had little
1:00.2	wheels for the numbers. Whoever set the prices spun the wheels to show the right number. One
1:06.4	of us joked that they probably rolled the prices higher when they saw the bus pulling up. And
1:11.0	as you do when you're trying to be funnier than the next kid, we started imagining the
1:15.0	prices bouncing around like stocks. That if you were shopping at McDonald's, you'd have
1:19.4	to yell by now when the price of a big Mac dropped to where you wanted to swoop in and pick
1:24.6	one up. What was totally laughable to us at the time has actually become the norm of pricing
1:30.8	today. Algorithms that can change prices by the minute are commonplace. It's not just air
1:36.1	fairs and hotel rates anymore. Check your ride-charing app a minute later and you can get a wildly
1:42.0	different number. Leave items in your online shopping cart and the next day you'll find a
1:47.7	new price. Now, there's a clear incentive for this. Companies eat more profit out of every
1:53.2	transaction. But what many of them fail to understand is how much this dynamic pricing is messing
1:59.8	with the psychology and trust of their customers. Joining us today to explain the harm that dynamic
2:06.6	pricing causes and how to manage it is Marco Bertini. He's a marketing professor at Asad
2:12.7	a Business School in Barcelona and a visiting professor at Harvard Business School with Odette
2:18.4	Konigsberg of London Business School. Bertini also wrote the HBR article The Pit Falls
2:24.3	of Pricing Algorithms. Marco, thanks for coming on the show. Oh, it's a great pleasure to be here.
	...

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