The conversation around pricing is changing among the economy’s stakeholders, including governments, companies, and consumers. Powerful technologies and trends are reshaping pricing, while C-level executives are becoming acutely aware of the financial and commercial impact that their pricing strategies have.

Five trends will determine where this conversation heads next. The underlying trend is the growing combined power of artificial intelligence and generative AI (GenAI). These technological forces are both solving and causing problems as companies chart their course through three other trends: the threats of price volatility, the risks and opportunities of dynamic pricing, and the growing pressure from markets and regulators regarding sustainability. The concept of fairness, meanwhile, is becoming a vital safeguard against the risks of technological or commercial overreach. The trends will affect customer behavior in the short term and may result in permanent shifts or displacements.

The ability of a company to generate long-term value will depend on its decision to resist, accept, or accelerate these five trends, even though they lay to some extent beyond the influence of any single company. In light of our definition of pricing strategy—conscious decisions on how to shape a market by determining the amount of money available, how that money flows, and to whom—business leaders should take all of these trends into account and define an integrated approach to manage their responses to them. Without such an approach, a company risks its profit engines sputtering and stalling, if not shutting down entirely.

The Underlying Power of AI and GenAI

It’s hard to imagine that any company will escape the influence of AI and GenAI, whether as a customer, competitor, or supplier. Machine learning and artificial intelligence provide the speed and power that make data collection, data analysis, and decision making much faster and potentially more precise than ever before. The day will soon come when sophisticated pricing is no longer possible without using AI for in-depth analysis and recommendations and GenAI for analyzing unstructured data sets and crafting communications.

Some retailers have implemented AI-powered pricing and not only turned complexity from an obstacle into a valuable resource but also experienced meaningful sustained growth in revenue, gross profit, and consumer perception. And some companies in the B2B and B2C sectors are enriching their available data by deploying large language models to quickly and thoroughly analyze unstructured data sets whose processing was previously neglected, incomplete, or very labor intensive.

Nonetheless, few companies have fully integrated these tools into their operating models in ways that generate additional value, reduce costs, and streamline processes. BCG’s experience on more than 350 GenAI projects reveals that only those companies that can implement the tools with a focus on process, people, and organizational culture—not just technology—can emerge with real success in terms of greater profitability.

Companies that offer GenAI solutions, whether to be used as standalone applications or integrated into other solutions, face their own set of pricing challenges. Importantly, they need to understand what drives their value and their differentiation. The pricing decisions that software companies and GenAI application developers make today will determine how quickly the adoption of GenAI accelerates, who benefits from it, and how much money organizations can reinvest into making improvements and building competitive advantage.

Price Volatility, Dynamic Pricing, and Sustainability

The interconnectedness of today’s markets—in terms of the exchange of goods, services, and information—intensifies three trends that have emerged strongly in the past few years.

Price Volatility. The risk that prices can fluctuate significantly and unexpectedly in a short period will remain for the foreseeable future. Inflation, however, is only one manifestation of price volatility. The compound effects of recent high inflation after a long period of relatively stable prices have forced many consumers to change their buying behavior and compelled many businesses to rethink their sourcing strategies. A company’s challenge lies in balancing the timing and extent of price increases and decreases so that it does not put its financial and commercial objectives at risk.

Meeting the challenge successfully starts with assessing a segmented, differentiated view of customers, because the effects of price changes can vary at the subcategory and subsegment levels. Companies should also track costs, customers, and competitors intensively and systematically so that they can improve their forecasting, reduce the risk of surprises, and respond quickly and confidently. Finally, companies should ensure that their pricing processes have the flexibility to help them avoid a margin squeeze between higher costs and adverse customer changes.

Dynamic Pricing. The underlying premise behind dynamic pricing is neither sinister nor complicated, despite the frequent public backlash to seemingly random price changes, or surge pricing. If demand, customers’ needs, willingness to pay, capacity, and competition are all fluid in most markets today, why shouldn’t the prices that customers pay also be fluid? Dynamic pricing covers a wide variety of pricing practices, including variable pricing, personalized pricing, progressive pricing, and an all-in commitment to what we call the Dynamic Game. The more a company knows about its customers, the better it can adjust the price and the value of a product or service concurrently to match their needs.

Dynamic pricing can create greater access to goods and services, as well as better purchasing options, when prices rise for some occasions and fall for others. Think of the different classes of air travel that emerged after deregulation decades ago. The ability to charge higher prices for business and first class helped democratize air travel by making the prices of coach seats flexible and affordable. But it can also create confusion, which is why dynamic pricing comes with two caveats. First, a company needs to support price changes with a compelling value story. Dynamic pricing won’t work if the only thing that customers notice is higher prices. Second, a company should resist the temptation to turn pricing decisions over to data science and algorithms. Rich sets of data and advanced tools enable companies to have dynamic pricing recommendations in near real time, but their implementation requires ongoing human guidance at a minimum and direct intervention in some cases.

Sustainability. This trend is having a growing influence on the supply side and the demand side, with consequences in both cases for pricing decisions. On the supply side, the transition to renewable energy sources requires significant investments that a company might not recoup in the short or medium term. The demand side is the wild card in this trend, as consumers become more environmentally conscious. A global survey by the BCG Henderson Institute showed that 10% to 20% of consumers are passionate about the environment and are willing to pay a green premium of 20% or more for the right product. Justifying that premium may require companies to redesign their existing offerings to make sure their sustainable versions deliver comparable value. We also expect that tapping the mainstream market will require a portfolio of solutions that bundle green features with benefits such as health and safety.

Fairness Is the Safeguard

Prices are fairest when a company sets them proportionally to the value that customers perceive, not at the maximum value that customers perceive.

Customers are now more attuned than ever to the question of fairness because they can make instant price comparisons, explore the financial disclosures of companies to understand how much money they earn, and put their own personal experiences into a larger context through sharing on social media.

When customers perceive prices to be unfair, their reactions can significantly damage buying relationships and brand loyalty. Customers can become angry and even react irrationally—such as opting for no value over some value—when a company crosses a line. Conversely, companies that offer transparent and fair pricing models can strengthen trust and customer engagement.

The challenge that companies face is that fairness has different and often conflicting definitions within and across cultures. That makes the perception of fairness a function of how well and how consistently a company explains the rationale behind pricing decisions and how those decisions benefit the customer. Fairness also poses an ethical challenge. That’s why we refer to it as a safeguard against pricing decisions that may expose the company to lasting repercussions.

Pricing strategy is now a high priority on the CEO agenda. The magnitudes of the benefits and risks are too great for companies to treat pricing as a subordinated function or to limit pricing improvements to the selective adoption of new technologies. CEOs need to play a key role in shaping how their organization implements pricing strategies, because they can keep pricing on a strategic plane instead of losing focus on the myopic and outdated pursuit of optimal price points.