20 December 2012

Price Dynamism

HBR | Rafi Mohammed | Why Online Retailers' New Pricing Strategy Will Backfire

It's emerged as this season's hot holiday pricing strategy for online retailers such as Amazon and Best Buy: dynamic pricing. That's the strategy, employed by industries such as airlines, in which a seller moves prices up and down quickly, charging similar customers different prices for the same product or service. [...]

When a retailer uses dynamic pricing, it's only a matter of time before those who realize they've paid significantly more than others for the same product start screaming "unfair." This is when the big problem erupts for a retailer ‘ the trust component of its brand is at risk.

Ironically, retailers that don't employ dynamic pricing stand to profit from this situation. Costco, for instance, pledges it will not mark-up its products' costs by more than 15%. In an environment of price uncertainty, this pledge seems fair and engenders trust with customers.
I think this environment benefits Amazon, if they're wise enough to keep dynamic pricing subtle. Well, really I think it benefits anyone with enough data and analytic capability to make small, targeted adjustments, but that requires a lot of sales to generate the data and a lot of smart people to figure out how to make it work, and to me that list consists of... Amazon.

If you drop prices by $50 people are going to feel cheated. But if you wiggle the price of some item by 73 cents how many people are going to feel insulted?

The difficulty is that you need to be pretty sophisticated to figure out that p+0.73 is an optimal price, with both good data and good algorithms, and you need to be big enough that an extra $0.73 per item is significantly profitable. This benefits big, technologically savvy firms with lots of sales across many SKUs, lots of repeat customers, robust technical infrastructure, quantitatively oriented management, etc.

So I woulndn't cast this issue as "firms with dynamic pricing will lose to those with fixed pricing." I think a much better frame is "firms with the sophistication to wield dynamic pricing like a scalpel will beat firms that use it like a cleaver."


PS How many people are actually using tools like CamelCamelCamel to deal with a dynamic pricing environment? Not many, best I can tell. Which leads me to believe, at current levels of dynamism, they don't care much.


PPS This is an interesting moral situation. I have no doubt that Mohammed is making a proper positive description. People do feel cheated when prices are lowered after they buy things. Firms are going to have to deal with that, because that's the world as it exists. But normatively, this is gross. It's nothing but envy.

If you paid $600 for an iPhone, you must have thought it was worth more than $600. You wouldn't have bought it if you didn't think you were benefitting from the transaction. If Apple later sells it for $400 to someone else, so what? No one has taken anything away from you. So what if someone else later got an even better deal? Yes, you want the consumer surplus that they got, but we all want things other people get. That's not victimization, it's covetousness.

Yes, envy exists in the world, and we need to deal with that. But far too much of our public discourse treats it like it's noble. If someone else got something you want that doesn't make you a victim. The reaction shouldn't be "oh no, you poor thing, you've been cheated by a Big Bad Company." It should be "stop being envious, you whiner." This is a lot harder to explain to people, but it ought to be done.

I would hope at least the R.C.Church would be on board with this approach, but instead I hear a bunch of crypto-socialist liberation theology bullshit.


PPPS Okay, that last line is a rather low blow. (Skipper, if you're reading this, I'm sorry.) But screw it; I'm in a mood and I have no patience for subtlety right now.

3 comments:

  1. I remember buying a 2nd Gen Kindle a month or two before they dropped the price by $100. My only response was "Oh well. I needed it then. The last month or two was probably worth that $100 to me." I didn't feel cheated. I don't really get that response. Don't you always have the risk of the big shiny TV going on sale the weekend after you bought it?

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  2. Exactly. You pays your money and you takes your chances.

    I can understand being chagrined. "Damn. I should have waited. Bad luck." That's one thing. But "Screw you Apple! How dare you, you cheating bastards!!"? That I don't understand.

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