Killing Customers Softly

Everyone’s talking breathlessly about the apparently sudden realization that Amazon and other retailers may be "secretly" shifting prices around to give different deals to different buyers. The buzz is being driven by an article from AP reporter Ted Bridis spotlighting a new study by The Annenberg Public Policy Center titled Open To Exploitation, which highlights the ignorance of American shoppers.>

percent of American adults do not know that it is legal for online
stores to charge different people different prices at the same time of
day for the same product. This Groundbreaking new study explores this
and many other shopping facts that all Americans need to know in order
to protect themselves from online and offline exploitation.

It’s interesting that many people passing the story around are focusing on Amazon–probably because it’s the most recognizable brand in online shopping. The story originated from an incident in 2000, which you can read about here at The Register. In that instance, Amazon was giving a better promotional price to first time shoppers than it was to loyal shoppers. Apparantly, the practice has evolved as companies find ways to deal with "bottom feeders" who scour the Web for the cheapest prices. According to the Bridis article, one photography Web site is searching your cache to see if you visited a number of other sites to check prices, and then offering a higher price to bargain hunters to discourage price shopping, while offering better discounts to loyal customers to try to retain them.

Companies have long offered acquisition discounts to attract new customers, which existing customers don’t get. You see this most gallingly in cell phone ads which offer fantastic premiums and benefits to new customers, but existing customers need not apply. The question was always how to do this in such a way that you don’t anger loyal customers enough that they switch to a competitor. Cell companies have relied on long contract terms that lock you in tight, while Amazon has depended on building a customer experience that can’t be replicated elsewhere, and which will hopefully overcome any annoyance over some missed deals.

What’s intersting now is that the practice seems to be evolving as companies gain the ability to track more behavioral data, and target those kinds of customers that are most profitable for them. It’s price strategy beyond the price war. What intrigues me most about this whole story is the realization that Amazon probably has the most powerful price modelling system on the planet. A number of years ago I worked on the repositioning and rebranding of Talus Solutions in preparation for their acquistion by Manugistics. Talus provided a system of profoundly robust price modeling applications–the kind used by automobile companies and airlines to figure out the revenue impact of myriad pricing programs, including discounts, promotions, and all the competitive strategies that go along with pricing. We’re talking about the kind of programs PhD economists sit in front of all day to fine tune programs that can swing revenue millions of dollars in either direction.

When you consider the volume and variety of what Amazon is selling, and the data they have to populate their models, you know they have some pretty heavy iron on hand to calculate how they can squeeze an extra dollar or two out of every sale they can. Some people feel that’s exploitation, but is it? No. It’s good business in an age where competition is driving profits down to a razor’s edge, and it’s what allows Amazon to keep giving customers the convenience and variety they want.

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