Monday, March 08, 2010

Look who is building the best database of price elasticity ...

Try this experiment. Log into amazon.com (if you have one), put 10 or 15 products into your shopping cart, then logout of amazon.com. Go back a day or two later and check your shopping cart. You would be amazed.

Amazon shows which products have changed price since you last checked the cart. A helpful window at the top of the page. That is helpful to decide whether you are going to buy them at the new price or you want to take them off your shopping cart. Here is what I saw 24 hours after I put 12 products in my shopping cart.

But wait a minute! Why are there so many price changes? And why are the price changes for a few dollars here or a few dollars there? This is March, not the big holiday season. No major sales promotions are going on.   What's going on here?

I have seen amazon.com change prices throughout the year. Have you had a similar experience? Why do you think they have so many price changes?

My guess is that they are building up a huge database of consumer behavior as price changes. They can use that to make more and more sophisticated decisions on pricing.

In 2000, amazon.com got into hot water when they charged different prices for different customers. Customers called it a "bad idea," and others branded it "sneaky" and "unethical". In its defense Amazon said that the prices people are offered had less to do with past purchasing decisions of customers and more to do with testing of customer behavior.

The price testing that they are doing here is a lot more acceptable to customers, I think. Do you find it odd that Amazon changes prices by trivial amounts so often? Do you think this is a better way of price testing than quoting different prices to different customers at any given time?  Do you think Amazon has the biggest price elasticity (how consumer price changes as price changes) database?

Karthik

6 comments:

  1. Fascinating Karthik. Thank You.

    Amazon also has insight into markets for used goods, especially books. I wonder how they integrate this data into their pricing algorithms. It will be interesting to see how widely this kind of dynamic transactional pricing will spread and what impact it will have in B2B.

    Steven

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  2. Since several years we, at FirstPrice, perform similar price tests both online and offline for about 5 of our retail customers, who are all market leader in their segment in Northwest Europe. In our experience changing prices frequently instead of asking different prices indeed has the advantage that you mention of not upsetting customers. In addition it is easier to make this type of tests work operationally especially offline. In offline fashion there are some nuances to take care of though. These nuances have to do with the fact that the inventory level influences sales performance.

    Regards
    Ernst-Jan

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  3. Steven:
    As far as I have seen, the dynamic transactional pricing (as you call it) has not seeped as much into books. Do you see it differently?
    Karthik

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  4. Ernst-Jan: Went to your website ( http://www.firstprice.nl ). Looks like you folks are offering interesting services around dynamic pricing and price sensitivity analysis. Would love to see some case studies from you. - Karthik

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  5. Steven:
    With price comparison being so prevalent online, online dynamic pricing is going to be the norm. In retail store, dynamic pricing is tougher but with mobile price discovery applications (scan the bar code when standing at the shelf and get the price from different online stores), there might be no choice.
    Thoughts?
    Karthik

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  6. Very Interesting !!

    Some thoughts...

    To build a good price elasticity database, its necessary to segregate the consumer population by socio-economic attributes. (a 50 year old couple with 3 kids making $50,000 a year will find an IPhone a luxury, but a 20 year teenager OR a $200k income individual may find it a necessity, and hence will have different price elasticities).

    On a given day, a consumer who has "made up his mind" to buy is not going to be influenced by a 5 to 10% price difference.

    A small price drop will win "deal sensitive" buyers, who don't have a good sense of the true worth of the product. So a 10% discount essentially is perceived as a deal.

    A price uptick may send the signal that the market demand for the product is increasing, so I must buy it. Triggering an emotional response.

    Finally, price changes like this may force a person to reevaluate subconsciously and may push him to buy. It could simply be a mind-share game.

    On similar lines, there are brick and mortar stores which consistently use the gimmick of 70% off or 80% off (from a high price) even for basics like apparel and accessories. I wonder if there is any study to show its effectiveness. Especially all discount retailers have moved more and more towards Everyday Low Price strategy to simplify the buying decision.


    Dilesh

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