Article

Should purchasing intent be used to alter prices?

Charging different prices to different people may be discriminatory for the same reasons "ladies' nights" have been banned in some states.

May 23, 2013

The following is an excerpt from a recent conversation on RetailWire, reproduced here with kind permission.

Technology is increasingly available that enables retailers to alter prices on certain products based on customers' intentions to purchase (or not purchase) other products. Researchers at the University of Arkansas label the practice "sequential pricing" and claim it can be highly profitable.

According to a new study from the university, sequential pricing occurs when a seller, aided by technology, is able to set the price for a subsequent product based on a customer's interest in or preference for an initial product. The goods are usually complementary. For example, if a customer shows interest in a shirt, prices can be set for matching pants.

"Think about how shopping carts offered at most online stores work," said Cary Deck, professor of economics in the Sam M. Walton College of Business, in a statement from the university. "A customer clicks on an item to view information about it and decides to add it to a shopping cart or not. The mere act of selecting an item to consider, regardless of whether the customer purchases the item, provides information to the retailer. It tells the store something about the shopper's taste and what other items may be of interest to the user. Stores can then set prices on those items accordingly, based on anticipated demand."

Beyond online, emerging technologies such as RFID can inform brick-and-mortar retailers that an item has been taken off a shelf or removed from a fixture, potentially allowing similar individualized pricing in the store.

The study, published in the journal Information Systems Research, indicated that a sequential pricing strategy worked better than bundling products and "pure" component pricing, in which a retailer simultaneously sets a price for goods that are close substitutes. Also, when customers' values for goods were highly correlated — different books about baseball, for example — profits increased when a retailer was able to increase the price of a second product based on the customer's decision to purchase the first product.

Not apparently explored in the study is whether altering prices based on buyers' intent will be acceptable to consumers.

A new book, “Attention All Passengers: The Airlines' Dangerous Descent,” by USA Today reporter Bill McGee, details "strong evidence" that shows airlines and travel sites are already changing prices based on an individual's characteristics or buying history as part of an overall exploration of "dynamic pricing."

Beyond privacy concerns, the practice of charging different prices to different people may be discriminatory for the same reasons "ladies' nights" have been banned in bars in certain states, Mr. McGee wrote in a USA Today column.

RetailWire BrainTrust comments:

"Sequential" pricing may feel like an odious practice online, but it's a variation on an ancient tradition in bazaars and souks. You size up your mark and charge all you can get.

Shoppers who become aware of these margin-boosting practices (and make no mistake, they will become aware) may tend to alter their attitudes about where and how to shop. So the retailer who takes this route had best consider the risks. If you think shopper loyalty is hurting now ... — James Tenser, Principal, VSN Strategies

Retailers are already customizing pricing based on individual shopping behaviors (from Safeway's JustForU program to Nordstrom's Fashion Rewards). Clearly consumers will accept the practice when it's framed properly.

The clear trend is from obfuscation in how a price is determined/changed, to pricing transparency.

Secretly changing the price of pants, based on having a top in your cart is not going to work. In the age of social media, those kinds of tricks will be discovered and broadly distributed immediately. The internet is full of sites giving advice on which e-commerce sites will offer a discount if an item is left in a cart long enough. Retailers can no longer rely upon hidden pricing tactics (see WSJ Story about retailers changing pricing based on geography).

Transparently telling the customer how to earn a better/custom price can and does work. San Francisco even varies the price of parking meters based on availability. — Jason Goldberg, VP Strategy, Multi-Channel Commerce & Content, Razorfish 

Rather than focusing on a merchant charging more knowing a customer's purchase intent, consider the merchant discounting less. Providing a discount to a customer already intending to purchase an item is the textbook definition of dilution. In practice, when we promoted certain offers, whether they were fare-based or market-based, we intentionally excluded customers that looked like they either already flew actively and/or flew between the cities being put "on sale." This allowed us to maximize incremental revenue, net of dilution.

How many retailers put out broad-based sales, offers or mark-downs only to have their most frequent customers line up to get discounts on things they wanted to buy already?

While this issue is much more complex for retailers (think inventory turns versus the perishable inventory of airplane seats), the principles absolutely apply. It's called yield management in the airline industry and it's already in practice by smart retailers today. — Phil Rubin, CEO, rDialogue

(Photo by Leo Reynolds.)