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Algorithms are increasingly used across many business functions, but some distributors make erroneous assumptions about the pricing solutions they are investing in, according to Lee Nyari in Managing Pricing Algorithms.
Barring some exceptions, vendors of distribution pricing solutions don’t usually talk about estimating elasticities or demand curves in their solutions – which are arguably hallmarks of true and complete statistical price optimization toolsets, according to Nyari.
"Given the marketing and black-box nature of the pricing package under consideration, some buyers erroneously assume that they are getting just such a thorough, bulletproof statistical price optimization toolset."
Investing in a high-end statistical price optimization tool may be overkill for most distributors since substantial improvement may be achieved using somewhat simpler but still quite sophisticated approaches.
"Some popular distribution pricing software may be described as a sophisticated toolset to implement a set of pricing strategies which have worked at other distributors, which are pre-defined in the solution, and which are supported by an advanced backend analytical platform. (these backend analytics tend to use basic statistical measures, such as distribution means and standard deviations to identify outliers)."
While these solutions are potentially quite powerful, don't view them as “bulletproof” price optimization tools. Their use does not mean that algorithmic risk is minimized in the businesses.
Read more best practices for distributors to overcome algorithmic risk in pricing in Managing Pricing Algorithms.