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Robo-pricing: The latest pricing game

September 24, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

In the July 8, 2012 Financial Times article, "Amazon 'robo-pricing' sparks fear," we get a glimpse at the latest game in pricing. According to the article, robo-pricing combines high-speed trading tools pioneered in the stock market and data mining to create algorithms to help companies "secure a prominent position on the site (Amazon). How will winners and losers be determined? Let's find out.

In my opinion, everyone will lose in this game. That may make me sound like a curmudgeon, but the reality is that I love games. The role-playing game, Dungeons & Dragons, is one of my favorites. So it isn't that I object to games, just gaming with real life consequences.

So why did I say that everyone will lose? To answer that question we need to look at each of the categories of people impacted by the game, which includes all of the traditional stakeholders:

• Sellers
• Consumers
• Vendors
• Investors

Sellers
It doesn't take much imagination to see how easy it will be for sellers to get caught up in the game - to become so focused on beating 'the competition' on price, that they lose sight of:

• The profits they're generating or, more likely, losing.
• Who their ideal customer is.
• How those customers needs are changing.
• How they will fund product/service offerings to meet those changing needs.
• The cost of developing, implementing and modifying the algorithms needed to 'compete.'
• How costly mistakes can be.
• How costly it will be to stop this game once it's begun.
• How to schedule production.
• What levels of inventory to maintain.

Who among us hasn't become so absorbed in a game that we've lost sight of the target? This game is no different. Sellers will fall into these traps if they choose to participate.

Consumers
To avoid duplication I've listed items in this section that could have just as easily been included in the seller section above. Regardless of their placement, here are dangers that consumers face.

• The ability to judge the value of any given offering.
• The ability to make informed choices among alternative offerings.
• Dissatisfaction with their purchases because the price dropped a mere 15 minutes after they bought.
• The need to expend more of our irreplaceable resource, time, to monitor the ever-changing pricing picture.
• Diminished choices. Companies can't fund new offerings on lower prices.
• Fewer product/service improvements. Companies can't fund the R&D necessary to meet consumers changing needs.
• Lost confidence in the seller's brand, especially if it was a strong brand.

Shouldn't our goal be to continuously improve our customers' experiences so that they develop a loyalty to our brand while we're demonstrating our loyalty to them? How is focusing on price, to the exclusion of all these other factors, going to create that bidirectional loyalty?

Vendors
Companies that focus on beating their competitors in the pricing game inevitably generate lower profits. To compensate for the lost profits they pressure vendors to lower their prices. Vendors, in an attempt to salvage their profits, will take shortcuts. They'll reduce quality, miss deadlines, choose cheaper shipping methods, whatever it takes to remain profitable under the intense price pressure their customers are imposing. The results are horrendous.

• Everyone in the supply chain takes a hit to his/her brand. Each member of the chain disappoints his/her customer all the way up to the ultimate consumer.
• Lost confidence in the brand often initiates a search for alternatives.
• Finger pointing creates divisiveness where partnership once existed.
• Vendors are driven out of business by low margins limiting the availability of good, reliable sources for your offerings.

Self-inflicted wounds are the worst and, BTW, they're all self-inflicted.

Investors
One of the reasons that investors chose to invest in your business, whether you're a publicly-traded company or privately-held, is that they believed that you'd produce a return better than they could get elsewhere. How is that possible when you're continuously reducing your prices?

Pricing is one of the easiest to implement, least expensive tools in your toolbox and yet it's the one of the most quickly discarded. Why is that? Why is it that we're willing to invest huge sums of money in developing algorithms to monitor and 'beat' competitors' pricing and not one iota on discovering new ways to serve our customers?

Don't your investors deserve better? Indeed, don't all stakeholders deserve better? If you're not going to avoid this ill-fated robo-pricing game for yourself, won't you at least do so for your customers, vendors and investors?

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