How do AI System Recommendations Work?
Personalized recommendation systems utilize machine learning and artificial intelligence algorithms to gather data, analyze customer behavior, and deliver suitable product suggestions. However, this process is continuous. To maintain the effectiveness of AI recommendations, data must be regularly updated and analyzed to generate suggestions that align with customers' evolving needs and interests. Furthermore, AI algorithms don't solely rely on customer behavior data.
Three types of data are collected for AI product recommendations:
- Consumer behavior: This includes browsing history, purchase history, clicks, and duration of interaction.
- Product information: Such as viewed categories, product descriptions, and prices.
- Contextual data: Encompassing factors like time of day, seasonality, and type of device used.
7 Benefits of an AI Recommendation Engine
Higher customer engagement
Relevant product suggestions keep customers engaged with a website or app for extended periods. A recommendation section brimming with appealing items boosts engagement and heightens the likelihood of customers spending more time exploring details and making purchases.
Increased average order value and online revenue
AI recommendations significantly boost sales by delivering products customers are likely to buy. Moreover, adopting these engines guides shoppers to relevant items, deals, and promotions, encouraging further exploration of your catalog.
With up-selling and cross-selling tactics, average order value can soar; for instance, a recommendation engine can suggest camping gear or outdoor apparel to customers purchasing hiking boots, or offer a subscription to regular deliveries alongside a bag of coffee beans.
Enhanced customer experience
Recommendation systems enhance the overall user experience by simplifying the process of finding desired items for customers. This convenience saves shoppers valuable time and reduces frustration, resulting in a more satisfying purchasing journey.
Improved personalization
By tailoring recommendations to individual preferences and past behaviors, a smart recommendation strategy creates a more personalized shopping experience. This not only boosts the customer's confidence in their purchasing decisions but also cultivates loyalty by demonstrating a deep understanding of their needs. Ultimately, the shopper feels understood and the result is higher conversion rates and increased customer satisfaction.
Stronger customer retention
Satisfied customers are loyal customers. By providing relevant recommendations, a company can craft highly personalized experiences that foster greater loyalty and customer retention. Simply put, when a website offers pertinent product suggestions, it increases the likelihood of online shoppers returning to it for future purchases.
Continuous inventory improvement
AI-powered recommendation engines continuously refine their suggestions over time through learning mechanisms. Utilizing first-party data enhances product offerings, while insights into customer reactions to previously recommended products aid in further refinement. Additionally, AI can discern which products are frequently purchased together, enabling the display of complementary items alongside each other.
Better customer understanding
Generative AI recommendation system employs data mining to assist brands in comprehending their customers' preferences and interests, crucial for customizing offerings to align with the requirements and desires of contemporary shoppers. The gathered data can then serve to guide marketing strategies, product development, and various other business decisions.
Types of Product Recommendation Engines
1. Collaborative filtering
To make predictions about customer preferences, AI leverages data from other users. In essence, individuals with similar past preferences are likely to exhibit similar preferences in the future.
Collaborative filtering compares a large number of users with a specific item, calculates similarity scores, and makes recommendations for the next product they might find appealing.
AI recommendation engines can employ either user-based collaborative filtering or item-based collaborative filtering methodologies.
2. Content-based filtering
This technique is used to predict customer’s preferences based on the characteristics of the items that they liked in the past. Content-based filtering focuses on product attributes such as size, color, style, material, and ingredients.Consequently, recommended items share similar attributes with the products liked in the past. Constructing a profile of a shopper’s preferences can subsequently assist another customer who shares similar preferences based on past product attributes.
3. Hybrid model
Hybrid AI recommendation systems enhance suggestion accuracy by integrating multiple recommendation techniques. This methodology merges the advantages of collaborative and content-based filtering, delivering a more exhaustive and tailored user experience. Furthermore, hybrid recommender systems can integrate additional information sources like demographic, contextual, or external data, further refining recommendation accuracy.
Recommender Systems Algorithms and Techniques
Matrix factorization
In AI recommendation systems, matrix factorization techniques are employed to examine the connections between users and items. The objective is to decompose a vast user-item matrix into a condensed collection of latent factors that encapsulate the fundamental relationships between users and items.
Deep neural networks
Drawing inspiration from the human brain's structure and function, machine learning algorithms employ multiple layers of "neurons" to process information and generate predictions. Deep neural networks excel at analyzing extensive datasets, leading to more precise and personalized recommendations.
Typically, two types of deep neural network architectures are utilized:
- Autoencoders, which are trained to acquire a condensed representation of user-item interaction data.
- Generative adversarial networks, adept at addressing issues related to data noise and sparsity in recommendation systems.
Contextual sequence learning
Another category of machine learning algorithm, contextual sequence learning, takes into account the context and sequence of interactions in ongoing user sessions or time series data when providing product recommendations. This contextual understanding within a sequence of interactions offers valuable insights into a user's present interests and preferences.
Furthermore, contextual sequence learning algorithms can be leveraged to model the sequential relationships among items, including the order of interactions, the time intervals between interactions, and the duration of sessions.
Wide and deep networks
Wide and deep networks represent a deep learning algorithm that amalgamates the strengths of both wide and deep neural networks. A "wide" network is adept at grasping straightforward, logical connections between features, such as the frequency of interactions or the average rating for an item. On the other hand, a "deep" network is proficient at discerning intricate, overarching relationships between features, such as the correlation between a customer's age and their preferred items.
Top Use Cases of AI-Based Product Recommendation + Examples
E-commerce & retail
E -commerce platforms heavily rely on product recommendation engines to provide personalized product suggestions to users. Entrepreneurs using AI in retail can customize the shopping journey, drive conversions, and foster long-term customer relationships.
Examples:
- Amazon utilizes a blend of collaborative and content-based filtering, as well as machine learning and deep learning techniques, to deliver relevant product recommendations tailored to individual preferences.
- Sephora, a global cosmetics retailer, employs AI recommendation systems to offer personalized beauty products to its customers. By analyzing user preferences, skin types, and past and repeated purchases, the algorithm suggests relevant skincare, makeup, and fragrance products.
Social media
Recommendation systems play a crucial role in social media platforms by enhancing user interaction with content. AI-driven recommendations are designed to increase time spent on the platform and drive ad revenue through personalized content delivery.
Examples:
- TikTok’s “For You” page delivers a personalized feed of videos to each user based on their likes, shares, and comments.
- Instagram’s AI system uses 2 recommenders to predict user interactions with posts or even to identify disinterest in suggested content.
Media and entertainment
Leading music and video streaming services employ AI-driven recommendation systems to suggest content that aligns with users' interests. Just like in other cases, these platforms analyze user behavior and preferences to curate personalized recommendations.
Examples:
- Spotify’s “Discover Weekly” and other playlists provide 30 new song recommendations to its 286 million active users. These recommendations are based on a hybrid recommender system and natural language processing, analyzing content created about specific songs or artists.
- Netflix relies heavily on recommendation systems, with over 80% of user content curated by them. By tracking and analyzing viewing habits, completion rates, and genre preferences, Netflix accurately predicts user’s favorite themes and actors.
Finance
In the finance sector, recommendation systems offer personalized advice on investments, credit products, and other financial services. Beyond driving profits, these recommendations help users achieve their financial goals, improve decision-making, and enhance overall financial well-being.
Examples:
- SoFi, a personal finance company, tailors its product recommendations based on users' financial profiles and goals to provide relevant and beneficial suggestions.
- Robinhood, a commission-free trading platform, uses AI recommendation systems to analyze customer’s trading activities, portfolio holdings, risk preferences, and market trends to provide tailored recommendations for stocks, ETFs, and cryptocurrencies.
