Bill Conerly | AI And The Economy: Better Marketing And Sales Good For Consumers But Not Statistics | TalkMarkets

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Marketing and salespeople appear likely to become far more productive thanks to artificial intelligence, especially the generative AI typified by ChatGPT. In a surprising paradox, better sales and marketing won’t increase total spending in the economy by more than a tiny amount. AI will, however, increase customer satisfaction.

The effect of AI on labor productivity varies with the task. Manipulation of words and numbers are tasks that are most affected by AI. Several economic analyses looked at tasks that could be aided by AI, and then they figured out which occupations most engaged in those tasks. Then they looked at the industries that utilized those occupations and concluded that sales and marketing would be one of the fields most impacted. (This article addresses consumer marketing and sales, not business-to-business activity.)

AI for targeting consumers

Some of the effects will be AI helping to write pitches. More importantly, messages will be targeted more narrowly to a prospect’s particular circumstances. Companies with long-term relationships with customers can use AI to better identify the products that a particular customer will want. For example, I own two small sailboats. I buy parts for them and apparel to wear sailing. But a large marine retailer sends me emails targeting expensive electronics used on large boats. Better artificial intelligence could enable them to pitch products that I’m likely to want.

AI will also help consumers find more appropriate results when they go shopping. Google searches tend to ignore descriptors included in search terms. When I searched for “men’s dress shirts button down collar,” the results included plenty of shirts without button down collars. The harder it is for a consumer to find exactly what is wanted, the more likely the buyer will settle for something less desired.

AI and competitive pricing

The result of AI will be consumers presented with buying options better suited to their needs and wants. Pricing may also be better. If multiple vendors can figure out what a particular consumer wants, then they will compete on price. There is also the possibility that AI will help businesses realize which customers are not price-sensitive so that they can charge them more. That’s more likely to be the case with customers who are loyal to one vendor rather than shopping around. Overall, pricing is likely to drop rather than increase.

Amazon was recently found to use an algorithm called Nessie to evaluate how competitors would adjust prices in response to Amazon changes. Such practices could lead to higher prices in some circumstances. In these early days of artificial intelligence applications, gains will accrue to early adopters. Eventually, though, many competitors will have access to good AI-informed applications that will lead to more competition, which will drive prices down.

So salespeople will be better able to identify potential customers most likely to appreciate their products, and consumers will be able to find the goods and services that best meet their needs at the lowest prices. But while this great advance will make consumers better off, they won’t spend much more.

AI and total consumer spending

The workhorse model of consumer expenditures used by economists for many decades puts income at the center of decisions, with small adjustments based on wealth, expectations of the future, and interest rates. Families won’t blow their budgets just because they find better opportunities for sporting goods or tickets to a Taylor Swift concert. If they find something really cool, they will spend less on other products.

Consumers will be better off because more often they will find the exact products they most prefer, without having to settle for something else. That will make them better off in terms of satisfaction. They will also likely find better prices more easily. That will enable them to buy more goods and services for the total amount of money they have chosen to spend.

The better pricing will probably not be fully captured in price indices. The Consumer Price Index is based on “a sample of approximately 90,000 commodities and services quotes in approximately 21,500 outlets around the United States,” according to the Bureau of Labor Statistics. In contrast, Amazon sells 12 million different products, according to the Big Commerce Blog. Add to that the goods and services are not listed on Amazon. CPI data collection was formed to capture the old retail environment, when people shopped at A&P and Safeway, Sears and J. C. Penney, local specialty stores and diners. With increasing expenditures online and with deals customized for certain customers, the CPI is only a rough estimate of inflation.

AI and consumer surplus

Consumers will be better off in ways not captured by our economic statistics. Our data counts spending, which is price multiplied by quantity, then summed across all consumers. But when a person spends $10 for a product he deems to be just barely worth $9.95, there is not much gain. The big wins come when a person spends $10 for a product that the consumer would have been willing to pay $15 for. That $5 difference economists call “consumer surplus,” and it captures how much better off the consumer is. Unfortunately, we have no reliable way to find out what the consumer really thought it was worth, so we don’t include consumer surplus in the economic statistics. But the concept is sound, even if unmeasurable. And consumer surplus will increase as companies and consumers both use artificial intelligence.

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