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How does dynamic pricing affect online purchasing behavior?
A university study finds using dynamic pricing online tends to make shoppers more savvy and potentially more bargain obsessed.
Researchers from Washington University’s Olin Business School in St. Louis conducted an experiment involving one million customers and 11,000 retailers on Alibaba.
Each of the members of the targeted group had left an unpurchased item in their online shopping carts for more than 24 hours. The shoppers in the test group received a discount — on average 17 percent — on the unbought item, while a control group did not.
In the short term, the results were highly favorable as sales of promoted items doubled.
The long-term results were mixed.
The promotion boosted customer engagement, increasing the daily number of products customers viewed and their purchase incidence on the platform. The majority of shoppers were only targeted once with the shopping cart promotion, yet increased engagement persisted for six months.
On the negative side, the test group increased the proportion of items they put in their shopping cart, hoping for another discount incentive. The prices they paid for items decreased subsequently, “possibly due to their strategic search for lower prices,” according to the study.
Finally, the promotion drove to a spillover effect as those who had received the promotion sought out better deals at retailers not involved in the initial promotion.
In their recommendations, researchers urged those implementing dynamic pricing programs to take advantage of the shopper’s willingness to view products and spend time on a platform. For example, better personalized recommendations could turn increased browsing into conversions.
But retailers were cautioned to “understand the long-term costs of promotions due to customers becoming more strategic.”
Dennis Zhang, an assistant professor and co-author, told Olin Business School’s blog, “People are not just keeping stuff longer in the shopping cart, they’re becoming bargain hunters. They’re spending more time looking for deals, even before they put something in their shopping cart.”
The findings suggest offering “surprising promotions or deeper promotions” could amplify the positive effects of promotions on engagement without leading the customer to expect regular discounts. Retailers were also advised to be “cautious about the spillover effects” because competing retailers might adopt similarly promotional strategies and drive down prices overall.
- How Do Price Promotions Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba – Olin Business School
- Consumers can outsmart online discount strategies, study finds – St. Louis Today
- Olin study: The unintended consequences of tinkering with online prices – Olin Business School
Discussion Questions
DISCUSSION QUESTIONS: Does dynamic pricing only train online shoppers to wait for promotions or seek them out elsewhere? What advice would you offer retailers around optimizing dynamic pricing for the short and long term?
Poll
BrainTrust
Bethany Allee
Senior Vice President Marketing, PDI
Bob Amster
Principal, Retail Technology Group
Online retailers must be cautious using dynamic pricing because customers will catch on quickly only to leave items in their shopping cart knowing they’ll get a discount. The retailers will make more sales short term but will soon be losing out on profit if forced to continue giving discounts just to make the sale. I would suggest that online retailers develop a better system for matched pricing. If the consumer continues to shop and finds a better price on a different site, offer the customer an incentive to not only share that price and have the online retailer match it or perhaps slightly beat it but also provide something to the customer for their effort, possibly a coupon used for their next purchase. Competition is intense, and retailers whether they are online or brick-and-mortar need to continue to find ways to be creative and stand aside of their competitors. It never works being just like everybody else. Be different, be the best, and you will win every time!
Why should we expect the online environment to be any different than our experience in-store — at least for this topic? If anything online shoppers are more conditioned to shop price. It’s even encouraged and facilitated in many categories by online price-bots like Priceline, Trivago and Shopify.
Consumers are learning about dynamic pricing. They don’t know that’s what it’s called, but they know that if they bounce around websites, come back later, etc., they may see a different price. That teaches the consumer to bargain hunt. And the danger in that is that consumers are becoming loyal to price, not the company. And when they see inconsistent pricing, they lose trust in the retailer and the retailer loses credibility.
Dynamic pricing definitely trains online bargain shoppers to wait for promotions or find them elsewhere. Dynamic pricing works as part of a long-term strategy if you align it with loyalty and footfall incentives (offline if available) – get folks loyal to your brand, get them in the store/store front, and use dynamic pricing as part of your on-going multi-touch communication strategy.
Dynamic online pricing is going to frustrate consumers like trying to buy an airline ticket has been doing for years. One price in the morning and a different price at lunch time? Oh boy!
Dynamic pricing most certainly has trained customers to shop around and wait for the best price. Customers are savvy, e-commerce customers especially are often hunting for the best price and are very aware that online shops are changing prices frequently. There are also plenty of apps that help customers see price history and help them decide whether to buy now or wait for a better deal. Retailers should keep this in mind when making pricing decisions and thinking about how it will affect their bottom line.
There is extreme danger here: the more exposed to downward movements of pricing to make the sale, the more exposure to the customer seeking intelligence on the location of the best deals. It’s like creating a deeper hole for retailers to fight over. It also challenges the validity of the regular price in stores.
Price shopping online has always been easier than doing it in brick-and-mortar locations. What dynamic pricing does is teach customers that there is another way to do it.
Rather than searching many sites for a better price they can search a couple and leave items in their basket and see who offers the best discount. In essence the customer is running their own reverse auction and waiting to see who will offer them the best price.
Retailers have trained shoppers to wait for 30 percent, 40 percent, 50 percent, 70 percent OFF.
Here we go again!
While dynamic pricing trains some shoppers to wait for a better deal, in some cases, if they wait, some prices may increase as supply is limited and sometimes the product may no longer be available if they wait too long. It is a game!
I wrote about this danger in this post: Are Your Employees Building Up Your Online Store While Sabotaging Your Margins?, as employees are also teaching consumers how to game the system. This can’t be good for business even though marketing directors are getting bonuses saying how they have cut down on cart abandonment.
There’s a reason that EDLP became popular. Indeed it’s telling that there’s a readily recognized acronym for it: people eventually tire of playing wack-a-mole. Even if they understand the reasons for price variations (and of course they frequently don’t understand them, or like them when they do). transparency is often non-existent with algorithms.
So my advice is not to attempt it unless you have a well thought-out strategy on what you’re trying to accomplish — not just because “someone-else-does-it” — and clear metrics to evaluate the results.
I feel that this is one of those “isn’t that obvious?” moments. Is it any surprise that customers who received a discount for leaving items in their cart tried the same tactic again hoping for another discount? Or that they generally were happy to wait for better prices, or sought to seek out deals elsewhere? Once you know that you can pay less than the price under the item, you’re going to try to. Most of us have probably done the same with searching for coupons before we click buy.
If a product is something that a company simply has to have then they are going to buy no matter what. It’s the purchases that we’re not 100% sure that we want or need that we tend to leave languishing. There’s no urgency behind it = no desperate desire to own it or limited edition concerns. I can understand retailers wanting to encourage people to complete those purchases with a discount, especially if it then boosts engagement, but I think they need to be mindful of the culture they’re creating.