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!

The Science Behind Moving from Clutter to Clarity

Previous retailing philosophies included such gems as “stack it high and watch it fly” and “more choice is better.” However, some multi-national retailers have discovered that reducing store inventory can actually improve the customer experience and boost sales. Increasing sales by reducing customer choice may sound like a paradox, yet retail experiments validate that shoppers don’t want clutter and instead prefer clarity.

A previous column, “When Less is More in Customer Choice” cited that many marketers believe innovation and competitive differentiation arise from giving customers more choices and options. But through the strategy of offering more choice, marketers may actually end up increasing complexity, costs and causing customers “mental fatigue.” And avoiding mental fatigue is what retailers are after, especially when they learn that simplicity in store layout and merchandising can lead to sales increases!

Cleaner, simpler and less chaotic is the new mantra for retailers. This means removing towering aisles of product twelve feet high, reducing in-aisle displays, and fewer bins of “grab bag” mixed product. Inevitably though, these improvements in the shopping experience will most likely lead to fewer products stocked and potentially a drastic reduction (10-15%) in SKUs.

But how does a retailer choose which products to eliminate, especially when there are so many variables (year-over-year sales comparisons, seasonality, pricing, profitability and trade promotion dollars, etc.) to consider? More than just traditional rules of thumb or guesswork, analytics and experimentation help retailers get this mix right.

Babson College professor Thomas Davenport has identified eighteen analytical trends that are relatively well established among retailers, such as assortment optimization and shelf space allocation, pricing optimization and market basket analysis among others.

These analytical processes help optimize categories and merchandise quantities effectively allowing retailers to “give space back” to shoppers without sacrificing sales and gross profit. In addition, retailers are using analytics to help decide which categories could benefit from private label sales—or store brands—which tend to carry higher margins.

Retailers are also experimenting with control groups to project how remodels will impact sales. Through testing and experimentation, retailers can discern which changes most improve metrics such as customer experience scores, sales, gross margins and inventory reductions.

For some retail managers, the idea of removing product, reducing aisle height, and even giving space back to customers is contrary to “what works.” However, customers are voting with their feet—and subsequently their wallets.

A win-win outcome is possible where customers gain a more satisfying shopping experience via brighter stores, cleaner merchandising displays, more room to maneuver carts in aisles, and less maddening clutter. And retailers benefit with improvements in category and overall store sales, inventory carrying costs and customer satisfaction scores.

Customers are already facing too many choices on a daily basis. More choice isn’t always better and in fact, reducing customer choice may be the best option for your enterprise.

Questions:

• Are there locations that you refuse to enter or shop because of clutter or too many choices?
• Are you willing to pay more for a clutter-free shopping environment?

China: Implications of an Emerging Middle Class

Chinese shoppersAs China slowly transforms its economy from dependence on exports to one driven by consumers, the emphasis will shift to retail sales.

Indeed, with nearly $9 trillion lost in Western stock and housing markets since 2008, the world urgently needs a new consumer. Marketers—will the Chinese middle class be the next battle ground for your products or services?  read more

Retail in China: Traditional Marketing 4Ps Still Relevant

retail-in-china1In Western countries where internet and social media marketing is the hot topic, some marketers have called a time of death for the traditional 4Ps. And while marketers in Western countries debate whether the 4Ps are pertinent in their markets, Chinese retailers are discovering that the traditional 4Ps are as relevant and applicable as ever.

In the United States, many shoppers dread the Christmas holiday season. Stores are packed with merchandise, the parking lot is full of autos, and shoppers bump elbows and carts on a regular basis. The panic and pandemonium are palpable.  Read more