internet pricing

Just thinking out loud…

Years ago, I was looking at a chain of convenience stores that had free-standing urban outlets as well as suburban/rural ones linked to gasoline stations.  The chain was beginning to implement variable, or dynamic, pricing.  It had installed electronic price signs on its shelves and had a wireless system it could use to change prices from one time to another during the day–either item by item or store by store, or across the entire chain.  The idea was to sell a carton of milk for $2 at noon  $3 at 7 pm and $4 a midnight.

As it turned out, the system never got off the ground.  There were technical legal issues, like whether you could use an electronic sign or whether a price had to be marked on each item.  But the main thing was that customers were outraged by the whole scheme.  They thought it was an incredible ripoff and stopped patronizing the chain.  Chagrined management apologized and shut the whole variable pricing effort down.

My guess is the same thing would happen today.

On the other hand, we all kind of know and accept that airplane seats and hotel rooms have been variable priced for years.  Hotels in college towns may triple room rates on graduation weekend.  Airlines raise their prices around traditional travelling high points.  Both routinely raise prices as the day its space will be used, based on computer analysis of demand and space availability.

No one minds.  In fact, through membership in rewards programs and with affinity credit cards, we flood hotel and airline companies with information about ourselves and our buying habits!

Then there’s e-commerce, ex travel.

For most publicly traded consumer companies this is not a big profit issue yet.  But it will be soon.  And for companies like Staples it already is.

We (sort of) know that websites practice variable intraday pricing.  We know that people in different zip codes get offered different prices, and that the distance to the nearest brick-and-mortar store that likely carries the item counts, too.  We know that if I’m thought to be a potential good customer, I’ll get different prices than if I’m perceived as not worth having.  We know that after browsing and returning to a site, the price we get may depend on whether we’ve closed/reopened our browser or not.  We also know that retailers don’t want to call attention to how much information they have about customers for fear of frightening them away.  (That said, I’ve recently noticed that if I leave an item unbought in a shopping basket, it follows me around in a semi-creepy way in subsequent browsing.)

Two potentially important things we don’t know:

–how much extra profit dynamic pricing brings internet retailers.  I have no idea.  If there were some way to make a small bet with a large payoff, I’d say that for a Wal-Mart or a Staples, it amounts to 5% -10% of internet revenue and 10%  – 20% of internet operating profit.

–when people become more familiar with what’s happening, will they react like the customers of my convenience store chain above, or like frequent fliers/stayers?  My guess is that it will be more the firmer than the latter.

Investment implications?   Two, I think:  for mixed bricks-and-mortar plus internet retailers, the internet business will be surprisingly strong; if I’m correct that consumers will see dynamic pricing as an abuse of trust, the negative reaction could be severs as/when its use is make evident (other than a huge journalistic investigation, I don’t see how).