Should Purchasing Intent Be Used to Alter Prices?
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.
- ‘Sequential’ Pricing Can Increase Retail Profits, Study Finds – University of Arkansas
- Are You Paying More Shopping Online Than Your Friends? – Live Science
- Do travel deals change based on your browsing history? – USA Today
- Travel advice: Are airlines quoting different prices to different people? – Toronto Star
Discussion Questions
Should retailers alter prices based an individual’s purchasing intent? Do you think this practice would result more often in a complementary product’s price being raised or lowered?
I think the first time I find I paid more because of sequential pricing would be the last time I bought from an online retailer. Nothing wrong though with offering me a discount on a sequential purchase. I have a very tough time envisioning this in a bricks and mortar environment, and I’m guessing it’s illegal in some states.
It’s hard to believe that intent to purchase would be a reason for a retailer to lower a price, unless it’s a last ditch attempt to encourage a consumer to add an item to a cart before the user submits an order. In most cases, a merchant will try to leverage buyer’s interest to increase margin on up-sell items.
In the short run, this clearly can be more profitable if implemented with powerful logic. However, if over time the word were to get around amongst consumers about a given retailer’s efforts to manipulate prices skyward, it might become a scarlet letter for them. Additionally, it’s possible that the practice may violate state commerce laws in some jurisdictions (?).
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….
Sequential pricing will work really well in a closed environment (the small store in a prison?), but in the real world, customers will rat out the retailer and abandon it in droves.
Why would my price be determined by my intent to buy? Are we negotiaiting? I doubt it? What is the first question I will be asked? “Can you tell me how serious you are in purchasing today?” Please point me to the used car salesman.
Altering prices based on purchase intent might increase profits for retailers, but it’s going to be a hard sell for consumers. Few consumers have anything good to say about the airlines, which constantly nickel and dime them. If the same pricing model is applied to stores where consumers shop more frequently, many consumers will opt to take their business elsewhere.
There are many ways to incent consumers to spend more other than through purchase intent. Smart retailers know how to use them.
From the article, here’s the flaw in the premise: “Not apparently explored in the study is whether altering prices based on buyers’ intent will be acceptable to consumers.” The “empowered customer” would find at least two reasons to object to this pricing practice.
First, the growth of “price transparency” makes it harder and harder for retailers (especially in e-commerce) to disguise the price for goods and services. Second, state attorneys general or bureaus of consumer protection (not to mention the FTC) would have a real issue with multiple in-store prices that conflict with “shelf prices,” especially if they are driven by RFID.
Bottom line: I would not expect “sequential pricing” to get off the ground.
Online retailers should absolutely take advantage of the immediacy of the medium and test offering complimentary items at both regular price and various degrees of discounting to those shoppers who place items on their list.
In the bricks and mortar environment, those retailers, like Stop & Shop that have “scan as you shop” technology, the same principles could apply. I am not convinced that RFID technology, as good as it is getting, is ready for this level of detail.
As far as charging different prices to different people, that is in essence what targeted promotions do. The only rub with variable pricing lies in the potential “shopper envy” syndrome, meaning that if other shoppers know you are getting a better price than them on the same item, that usually spells trouble for the retailer. However, if the variable pricing is targeted and stealthy, it is absolutely a new tool for retailers to use to optimize limited “markdown” expense.
As the study states “The model revealed that sequential pricing could outperform bundling and simultaneous pricing of individual items in certain situations.” The key word here is COULD. Sure it could, but find a retailer that “would.”
Some college studies are great for thinking and modeling of data and reality, but they are just for that and not destined for the real world…especially the retail world.
Just for thinking: I could imagine I pick up the fly reel and the price on the 7-piece portable fly rod changes. I put the reel down and look at the rod wondering “why is this priced so high? The reel was a good deal…hmmm” I then leave the store.
…
If this gains traction, I predict legislation will follow outrage.
Airline pricing is driven by demand, and states don’t seem to have a problem with that. Knowingly raising price because the supply or timing is short hasn’t been popular with consumers of course—but it hasn’t dropped demand either.
I agree with other commentators that consumers would not like to know the price of their pants is going up if they buy the top. The determining factor in this one may well be availability of choice. There are only so many airlines and your only choices are to fly Southwest or try to game the system. There are lot’s of places to buy pants. I agree that consumers will likely vote with their mouse/credit card. (Gee, anyone besides me remember when that used to be “feet/wallet”?)
In terms of understanding and being able to quickly react to a customer’s purchase intentions and preferences, this has been [mostly] limited to online shopping, as they have had the ability track behavior and provide personalized responses, offers, suggestions, etc.
But with mobile and its growing use in-store, these capabilities are going to expand to the other +90% of retail—the physical store.
If a retailer is driving for profitability, there is also the opportunity to increase prices for customers who demonstrate an interest in a product—that is, greater interest could be an indication that they are willing to pay more. Conversely, there is the strategy to reduce a price for a customer who shows less interest in a product to help them make the purchase decision. That’s a reversal of some basic loyalty programs where frequent shoppers are rewarded for better deals.
Amazon played with personalized pricing in the early 2000s and experienced a tremendous negative backlash. Safeway has intimated that their Just for U will be able to do something similar—and that hard-coded shelf prices may be something of the past.
The danger is obvious. Customers who feel they are not getting the best price or don’t understand how to get the best price will lead to problems for the retailers.
NO! Retailers need to be consistent and transparent in their pricing or the customer will walk. ‘Nuff said!
I don’t understand the negative reaction to this idea. As I understand “sequential pricing” per the example, “if a customer shows interest in a shirt, prices can be set for matching pants.” Isn’t that the same as if a customer shows interest in a car and the salesman says if he buys now he can get 50% off on certain options? Wouldn’t that be the same as someone considering a new flat screen TV and the salesman says, “if you buy it now, I can save you $200 on a Dolby sound system”?
I can go on and on with examples. What am I missing?
Retailers should have one price which is applied to all customers. I work just as hard for my money as the next guy and would very much resent a retailer charging me more than another customer.
For my money, this is the greatest shortfall for most loyalty programs. Unlike the original loyalty programs (frequent flyer) which rewarded customers for use of a service (loyalty), current programs reward simply for holding a card. If a retailer wants to reward a consumer for masking a combo purchase then the discount should be shown only on the second or combo item. I think, knowing the retail mindset, that the primary product would not be discounted or even have it’s price increased in order to get a discount on the second item.
Retailers do this all the time now in that they accept price promotions from manufacturers and qualify in some way passing the discount on to the consumer. They get a discount on every can of pork and beans, but only pass it on to their loyalty card holders, forcing others to get a card or pay a higher price. Frankly, I think this is a despicable business practice. If I had my way it would be against the law!
Retail pricing is no longer a simple process. The success of Priceline and other dynamic pricing models have shown there is room to play, just like bargaining with the local merchant in some countries. Many retailers have tiered pricing from their frequent shopper program. This should be carried over to online as well.
Where a retailer will get caught is changing prices online but not in the store. We have no valid method to determine intent within the store. My suggestion is not to get too fancy online, which could later cause problems in the store.
I’m with Gene on this in that I’m surprised by the negative reaction (and baffled as to what’s novel here): I don’t see a legal problem with this since the algorithms are, presumably, being applied equally to everyone (it seems much more like a “buy one get one free” situation than Ladies Night promotion).
I am confused though—and judging by the disparate remarks, many of my fellow respondents are as well—as to whether the point is to raise prices on tied purchases or lower them. The former sounds unlikely, not so much from illegality as from impracticality (why would people be willing to pay more on a subsequent purchase than on an initial one); whereas the latter might be giving margin away. But the idea of bundling purchases together is age-old.
This has everything to do with the shopping experience positioning by the merchant. Many of the comments by contributors here share some real concerns. However, if this results in a highlighted discount for the shopper, why couldn’t the merchant reap the benefits of upselling, while making the shopper feel good about making the additional purchase?
Interesting discussion and reactions and I agree with Gene and Notcom—it seems everyone is focused narrowly on the example of charging more. Another way to illustrate this is the idea of dilution, something we first recognized years ago doing promotions for (you guessed it): the airlines.
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.
“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….