The service draws on Amazon's vast database of past sales data and analyzes the relationship between price changes and number of copies sold. KDP Pricing Support factors in each title's length, category, rank, reviews, price history, and its author's related sales in order to provide a suggested price range for a newly listed ebook.
The price suggestion is shown as a graph which reflects how many sales would be made at each price point, and will look something like this (Thanks, Steve!):
The service is still in beta, but a number of authors have already tried it and posted their experiences on the KDP support forums. Not all of the authors are pleased with the pricing suggestions; while one noted that "I don't know what all it uses to determine this, but it suggested that I price my book at $6.99. With a projected +5% earnings and -25% sales", others noted that they were told they were underpricing their ebooks:
I have two books in a series. The first one is .99 at the moment and for the past two months, (89,000 words) and the second is 2.99 (85,000 words). They suggest I price them at 6.99 each, and the other book, not in a series, I have at 2.99, (85,000 words). They suggest 4.99.
The pricing beta suggested that I increase my book from $2.99 to $5.99. I don't think anyone will buy a new author's book at that price, but I am willing to give it a try based on feedback.
And one author reported that their book was marked as part of a series, leading KDP Price Support to suggest that the price be reduced (the first title in a series is often cheap or free to attract readers).
KDP Pricing Support is available to all authors and can be found in the Rights and Pricing tab for each title. It works with both existing and newly published ebooks, and is available to all authors during the beta. Amazon wants everyone to try it so they can see which features are used the most.
You can find more details on the KDP Support Page.