Thursday, April 27, 2017

Caveat Emptor

Traditional retail stores are under siege. The numbers of store closings indicates the dimensions of the problem for bricks and mortar stores.

This chart from The Wall Street Journal shows the effects. A projected 8,000 store closings this year. U.S. retail employment is stagnant. Three major retailers, The Limited, BeBe and WetSeal, are getting out of retail stores completely. The Limited will still have an online presence. WetSeal is finished for good and it is not clear yet if BeBe will continue as a internet retailer only.

If you look at this evidence you might come to the conclusion that the consumer has won. They have voted with their pocketbooks and they prefer the ability to comparison shop and the convenience of shopping online. It would appear that consumer power is winning the day.

However, will that be the end of the story?

I first studied the theory and practice of dynamic pricing over 20 years ago. Simply stated, dynamic pricing suggests that no two consumer are alike. They have different motivations for buying based on their current situation and environment and will pay different prices for the same product or service.

In order to best maximize profit, a seller needs to understand these differences. The airline industry was one of the first to recognize the power of dynamic pricing and it has long priced its seats accordingly. The business traveler in seat 6C may have paid $799 for her seat but the vacation traveler in 6B was only enticed to fly by the $199 fare.

Coca-Cola understood these differences many years ago in how they priced their product in supermarkets versus the fountain market. Consider your willingness to pay for a Coca-Cola. In a grocery store, you may decide you don't need Coke in your house if it costs more than $1.49 for a 64-ounce container (2.3 cents/oz) but you willingly pay that for a 16-ounce cup at a fast food restaurant (9.3 cents/oz) and you might pay $3.49 for the amount of Coke (21.8 cents/oz) at a bar with your friends in order to be sociable.

There is a 10-fold factor on what you will pay for a Coca-Cola based on your circumstances at the time.

Vintage Coca-Cola Ad (1960)

The Atlantic is out with the downside of the demise of traditional retail and it points in the direction of dynamic pricing as something we all need to be aware of as we shop, compare, click and have our products shipped to us. As Jerry Useem, the author of the article puts it, "How Online Shopping Makes Suckers Of Us All".

Credit: The Atlantic, May, 2017 issue

Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.
They have ample means to do so: the immense data trail you leave behind whenever you place something in your online shopping cart or swipe your rewards card at a store register, top economists and data scientists capable of turning this information into useful price strategies, and what one tech economist calls “the ability to experiment on a scale that’s unparalleled in the history of economics.” In mid-March, Amazon alone had 59 listings for economists on its job site, and a website dedicated to recruiting them.

The prices that you see in a traditional store are all the same for everyone. That may not be the case when you shop online.

“I don’t think anyone could have predicted how sophisticated these algorithms have become,” says Robert Dolan, a marketing professor at Harvard. “I certainly didn’t.” The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price—not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor—may become an increasingly unknowable thing.

We all came to love the internet for the freedom, convenience and power it has given us. It broke down walls (literally in traditional retail) and gave us a whole new world of transparency.

However, transparency works both ways and internet retailers know more about you than you know. They increasingly know what is important to you and what is not. Are you a bargain shopper or an impulse buyer? When you are more likely to shop? (Tip from the article-most people shop weekday so retailers often raise prices in the morning and lower prices in the evening when there is less traffic).

I have only two words of advice, and despite all the changes in technology and the evolution of man and society, it still holds as much weight today as it did 2,000 years ago.

Caveat emptor.

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