Real-Time Pricing Algorithms – For or Against Us?

In 2012, Cyber Monday sales climbed 30% over the previous year’s results. Indeed, Cyber Monday benefits both online retailers as they gain massive Christmas spend in one day, and consumers can shop at work or home and thus skip holiday crowds.

And yet, underneath the bustle of ringing “cyber cash registers”, a battle brews as retailers now can easily change prices, even by the second, using sophisticated algorithms to out-sell competitors. Consumers aren’t standing still though. They also have algorithmic tools available to help them determine the best prices.

Christmas ballLet’s say you are thinking about buying a big screen television from a major online retailer.  The price at 12 noon is $546.40, but you decide to go get some lunch to think about it. An hour later, you check back on that same item and now it’s priced at $547.50.  What gives?  Depending on your perspective, you’ll either end up being the beneficiary of algorithmic pricing models or the victim.

A Financial Times article notes the price of an Apple TV device sold by three major online retailers changed anywhere from 5-10% daily (both up and down) in late November. Some HDTVs changed prices by the hour.

These up to the minute changes are made possible by real time pricing algorithms that collect data from competitor websites and customer interactions on their own sites, and then make pricing adjustments based on inventory, margins, and competitive strategies.

An algorithm is really just a recipe if you will, codified into steps and executed at blinding speed by computers.  Thus, a pricing algorithm may be using inputs from competitor websites and other data sources, and then based on pre-defined logic, churn out a “price” that is then posted on a website. Typically this process is executed in seconds.

Thus, it is increasingly common –depending on the specific item, day, hour, or even minute—that prices of online items change in a moment’s notice. If keeping up with rapidly rising and falling prices seems like a shopper’s nightmare, you’re right. However, consumers also have tools to fight back.

The same FT article points out that some consumers are using websites such as Decide.com to determine the best if not the most “fair” price points. Using either Decide.com, or Decide’s convenient smartphone app, for an annual fee of $30, a consumer can access pricing predictions of items based on Decide’s predictive pricing algorithms.  Simply look up an item, and Decide.com gives its best prediction of when to buy an item and where.

Today, we take for granted that grocery store prices generally don’t change within the hour, and that prices at the gas pump (while sometimes changing intra-day) generally don’t change by the minute. As data collection processes move from overnight batch to near real time, expect more aggressive algorithmic pricing, coming to a grocer, gas pump—or theater near you!

Everything – But Faster!

Speed might not be the only way to win in the marketplace, but it sure does help. Companies are discovering that the element of speed—in decision making, delivering products and services, and communicating is one of the few bastions of competitive advantage still remaining.

Zero latency is the process of removing/reducing the time between an event and action. Those companies that can react and respond to changing market conditions faster than competitors (in a value creating manner) usually end up the first to the lunch table.

Image courtesy of Flickr. the prodigal untitled13.

Amazon is a great case study of a company pursuing zero latency wherever possible.

Take for example Amazon’s initiative to roll out new warehouses on a global basis to compete with retailers. Currently on Amazon.com, when a customer orders a product they have shipping options including overnight delivery. However, if new warehouses are closer to customers, it’s feasible for Amazon to offer same-day shipping (by 4pm).  This of course will put pressure on brick and mortar retailers that currently have the advantage of “get it right now”.

Amazon has also worked out this “time to value” concept with cloud computing solutions. In the past, if a particular company wanted to acquire hardware/software solutions, it was necessary to negotiate with vendors, sign contracts, and get products shipped, installed and turned on. Such a process could take anywhere from two weeks to two months or more.  With cloud computing, it’s now a lot easier to acquire similar capabilities from Amazon Web Services with just a credit card and a checkbox for the customer agreement for use of services.  With cloud computing, the time between event (the need for IT solutions) and action (gaining IT solutions) is down from weeks to minutes.

High frequency trading is another area where speed equals advantage. With this mode of trading, the key for hedge funds and investment banks is to co-locate servers at stock exchanges to reduce the roundtrip time needed to complete an equity trade. Now traders are competing with faster machines, better algorithms and faster pipes into stock exchanges. In a field where trades are made in microseconds, those who can trade faster than others gain significant advantage to the tune of millions of dollars.

Of course, there’s also a downside to speed.  As business processes are cut and paste to reduce steps, and decisions are made faster and faster (nearing the speed of light) it’s much easier to make mistakes. And when mistakes are made (see Knight Capital), there is little to no time to correct them.

Speed wins, but there’s definitely a careful balance between winning (too) fast and losing slow. The key for each business is to find that balance and discover areas where customer needs aren’t being met, then work to reduce the time between event and value to as close to zero as possible.

One Secret for Success in Cloud Computing – Fewer Choices

Retailers have long followed the mantra of “stack it high and watch it fly”. In fact, stores often pile goods to the ceiling, make shoppers navigate in-aisle displays, and price everything with bright and obnoxious signage.  However, some progressive retailers have discovered that reducing “choice” can actually boost sales.  And in terms of cloud computing, one successful vendor has taken a page from this retailing playbook by removing confusing computing choices.

Image courtesy of Flickr

In “Less is More in Consumer Choice”, I cited a 2007 study in which researchers conducted experiments in a shopping mall aimed at understanding mental fatigue associated with too much choice.  The studies concluded that when faced with too many buying options, study participants couldn’t stay on task in completing projects—in effect their brains were overwhelmed by choice overload.

The folks at Amazon Web Services (AWS) have figured this out.  Cloud computing can already be avery complex endeavor with behind the scenes infrastructure consisting of interconnections among servers, networks, applications, controllers and more.   So, by abstracting the complexity of cloud architectures via a simple user interface, AWS makes cloud computing easy to consume.

But AWS has taken simplicity a step further by actually reducing mental clutter and choice. Cloud Scaling CTO, Randy Bias notes AWS reduces choice by simply providing infrastructure as a servicewithout all the bells and whistles associated with offering the entire cloud stack.  AWS provides and maintains virtualized storage and compute resources, AWS users need to provide whatever else they require. AWS, Bias says, has “reduced choice by simplifying the network model, (and) pushing onto the customer responsibility for fault tolerance” as server instances are not persistent.

Bias also explains that AWS’ EC2 service requires developers to fit their applications to the infrastructure, not the other way around.   Amazon is effectively saying to developers, ‘Build your applications with our infrastructure in mind’ so they are cloud ready, instead of ‘build your application’ first, and then leave it to AWS to figure out how to scale it.

Going forward, there will be plenty of technology savvy buyers with the ability to sort through myriad complex cloud computing options. However, there will also be large segments of cloud buyers (i.e. those in lines of business) that will want to sign up for cloud computing with corporate credit cards. These buyers will appreciate simple user interfaces, easy to access resources, and less mental clutter and exhaustion for buying decisions.

When it comes to choice architecture for cloud computing, AWS shows us less really is more.