The price is right
In 2013, the Canadian company, 360pi, a specialist in strategic pricing, tracked the prices being charged by 28 retailers, including Amazon. “On average, Amazon changes prices on 15-20 per cent of its assortment every day,” says Jenn Markey, 360pi’s Vice President of Marketing. “Amazon made more than three million daily price changes last November, but this kind of dynamic pricing is now attainable for most retailers.”Amazon uses ‘robo-pricing’, a technology that monitors competitor prices and then re-prices identical products at Amazon by an amount calculated to siphon away sales. However, this is only variable pricing’s Level One. Retailers are only just getting warmed up.
Amazon made more than three million daily price changes last November.
- Jenn Markety, 360PI
At variable pricing’s Level Two, customers are being charged a different price for an identical item, but it’s called ‘yield management’. For example, the last time you rolled your luggage into hotel room 908, chances are good that the person in 907 paid a different price for an identical space. This does not constitute price discrimination so long as the hotel is charging the same price at any given moment in time to all customers, even if they are changing that uniform price quite regularly.
However, some retailers offer different prices to customers at the same moment in time, based on each customer’s purchase history and his or her perceived ‘willingness to pay’ to get the highest possible margin. In December 2012 The Wall Street Journal ran an exposé of several companies that were doing this, including major US office supplies and home improvement chains. But the practice does not sit well with many people, who view it as deceitful and likely to alienate any customer who gets wind of it. Online retailers can easily conceal such price discrimination but what if the concept is taken into a bricks-and-mortar store? Welcome to variable pricing’s Level Three.
UK home improvement chain B&Q is trialling digital shelf labels that can identify a passing customer by his or her smart phone signal, tap into his or her loyalty program or purchase history, then tailor the price (higher or lower than usual) displayed onthe shelf label.
The bottom line
Good idea or not? That would presumably depend on whether you are the customer getting the better price or the curious person trailing behind who finds out he’s paying more. A retailer may be sacrificing some of its rank-and-file customers on the altar of pleasing its most loyal ones, which does not seem like a particularly sound long-term strategy.
Should in-store price discrimination prove too difficult to practise, it will nonetheless become a staple of online retailing. Why? Because different people have a different threshold price they will pay for any item. If the technology is there to profile each customer, then retailers have a new lever to improve sales and margins.
Variable pricing is here to stay because it has a powerful economic rationale. More questionable is whether it can be practised successfully in physical stores. The answer to that question is “probably not”. Once the word gets around that retailers are sorting their customers into winners and losers, customers will not be amused.