Interpretable Price Elasticity Estimation

Understanding how price changes influence customer demand

The AI pricing revolution

Understanding the sensitivity of customers to price changes has long been the cornerstone of pricing strategy across all industries, from growth companies to global powerhouses, as it informs optimal pricing decisions to maximize revenue.

In recent years, the rise of AI has revolutionized price-sensitivity estimation, moving the focus from expert-knowledge and common sense to data-driven approaches.

However, most demand estimation methods rely heavily on black-box algorithms that make it impossible for pricing experts to understand why a certain discount leads to a change in sales.

Estimating discount effects on car sales

Our client, a large car manufacturer, had put in place a production pipeline using accurate predictive models to estimate the influence of discounts on customer demand across their wide range of car models and configurations. However, despite the predictive power of these models, the lack of interpretability made it hard for business users to trust the solution and limited its adoption.

By combining data on historical sales and pricing with product characteristics, we used Optimal Decision Trees to predict how customers would react to different pricing strategies. The resulting model performed similarly to the previous black-box methods, while remaining completely transparent to users.

Illustrative Optimal Tree predicting customer sensitivity to discounts

Turning data into trusted actions

Our models brought an interpretable view to price elasticity estimation, and solved our client’s main concerns:
  • Increased adoption rate

    Business users gained trust in the predictions once they could understand the logic behind the models. We integrated interpretability directly into their workflow, with an intuitive dashboard where they can easily see the decision path leading to the predicted price sensitivity.

  • Faster model improvements

    Interpreting the feature combinations that were being used in the predictions allowed data scientists to better understand the structure of the problem and to work efficiently to improve the models further.

Unique Advantage

Why is the Interpretable AI solution unique?

  • Auditable, robust and trusted

    This framework allows for complex and accurate modeling of demand elasticity while maintaining interpretablility

  • Unlocks a culture of collaboration

    Understanding the logic behind prediction enables collaboration between data scientists and domain experts

Want to try Interpretable AI software?
We provide free academic licenses and evaluation licenses for commercial use.
We also offer consulting services to develop interpretable solutions to your key problems.

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