Interesting article at the Wall St Journal on how merchants on Amazon are taking a page from the airline (among other) industries to maximize revenue with fast changing pricing based on sales volume and competition.
It used to be only airfares that changed every minute. But now, prices of everything from clothing to toilet paper are fluctuating dramatically online. Julia Angwin explains on The News Hub.
The fast-moving Internet pricing games used by airlines and hotels are now moving deeper into the most mundane nooks of the consumer economy.
Deploying a new generation of algorithms, retailers are changing the price of products from toilet paper to bicycles on an hour-by-hour and sometimes minute-by-minute basis.
The pricing wars were fought last month over a General Electric microwave oven. Sellers on Amazon.com Inc. AMZN -0.16% changed its price nine times in one day, with the price fluctuating between $744.46 and $871.49, according to data compiled by consumer-price research firm Decide Inc. for The Wall Street Journal. Best Buy Inc. BBY +1.58% responded by lifting its online price on the oven to $899.99 from $809.99 after the Amazon prices rose, then lowering it again after Amazon prices for the oven dropped.
The most frequent price adjustments are occurring among Web stores selling products on Amazon, which encourages ruthless competition between retailers vying for the top spot among search results. Sellers such as children’s clothing store Cookie’s use software to change prices every 15 minutes in order to stay on top of Amazon rankings. The store’s owner, Al Falack, said he often sells clothing cheaper on Amazon than at his bricks and mortar store in Brooklyn, N.Y.
“We’re finding that we’ll receive something fresh and new in the season and before we give it a chance to sell, we are selling it for less than we wanted,” Mr. Falack said.
In the 1990s, airlines became known for constantly changing prices, based on how many seats they had available on a flight and prices charged by competitors. Hotels soon followed with their own “yield management” systems, that allowed them to change room rates constantly.
Now, Internet retailers are using similar software. A goal is to maintain the lowest price—even if only by a penny—so that their products will show up at the top of the search results by shoppers doing price comparisons.
One crucial difference with the travel industry is that Internet retailers are usually competing against a lot of different competitors with identical products. By contrast, airlines and hotels have a fixed number of competitors, and certain players dominate certain markets.
Mercent Corp., the company that provides the software used by Cookie’s, says it changes the price of two million products an hour. Mercent says it makes price decision based on a variety of factors such as competitors’ prices, competitors’ shipping prices, manufacturer price restrictions and seasonal sales. Retailers pick their settings to determine how frequently prices are adjusted, which products are tracked and which competing websites are ignored.
The most frequent changes are for consumer electronics, clothing, shoes, jewelry and household staples like detergent and razor blades.
“The long-term implication is that a price is no longer a price,” said Eric Best, chief executive of Mercent, which tracks prices for more than 400 brands.
For vendors that sell on Amazon, having the lowest price on a product is the quickest way to get space in the coveted “buy box,” Mr. Best said. A product in the buy box, or the default box that adds a product to a shopping cart, is picked more than 95% of the time by shoppers, he said.
Mr. Falack of Cookie’s said that changing prices more frequently has boosted sales dramatically, but requires a lot of attention. First he set the software to beat his competitors by a certain percentage. Then he set a floor price below which he wouldn’t go. Then he restricted his competitors to those who had at least two stars out of Amazon’s five-star rating system.
For consumers, the result is more volatile pricing. Once the low-price vendor for a particular item sells out, rivals selling the same product can immediately lift their prices without fear of being undercut.
Hugh Lee, a 32-year-old from Seattle, said he extensively researches products and prices before pulling the trigger on a purchase. And even after buying something online, he monitors the price and asks for a price adjustment if it is lowered. “It’s a lot of extra work,” he said.
So far, shoppers are winning the price game about as often as they lose—with about half of price changes going down, and half going upward, according to Decide.com, which tracks prices of products over time to determine the best time to buy them.
The price changes can be dramatic. Last month, retailers on Amazon.com changed prices on a Samsung 43-inch plasma television four times over the course of a day, between $398 and $424, according to Decide.com. Around midday, Best Buy boosted the price to $500 from $400 before dropping it back down, while electronics retailer Newegg in the morning raised its price to $600 from $500. Amazon, Best Buy and Newegg declined to comment.
Before software, stores would send employees to their competitors’ stores to jot down prices by hand, said Rafi Mohammed, founder of Culture of Profit, a Cambridge, Mass., consulting firm that helps retailers with their pricing strategies. Once e-commerce took off, companies scanned their competitors’ websites to make adjustments, he said.
The new software has greatly speeded up the process. Online home goods retailer Wayfair changes hundreds of thousands of prices daily, said CEO Niraj Shah. When it finds pricing discrepancies—like if a product is priced 5% higher than a competitor—the company quickly makes adjustments.
The pricing works both ways. If Wayfair finds that it is selling a product for much less than its competition, it can then raise the price to be more in line with the market’s pricing, said Mr. Shah.
“In the age of the Internet, fixed prices are a thing of the past,” said Oren Etzioni, professor of computer science at the University of Washington and co-founder and chief technologist at Decide.com.