How does dynamic pricing affect online purchasing behavior?
A university study finds using dynamic pricing online tends to make shoppers more savvy and potentially more bargain obsessed.
Researchers from Washington University’s Olin Business School in St. Louis conducted an experiment involving one million customers and 11,000 retailers on Alibaba.
Each of the members of the targeted group had left an unpurchased item in their online shopping carts for more than 24 hours. The shoppers in the test group received a discount — on average 17 percent — on the unbought item, while a control group did not.
In the short term, the results were highly favorable as sales of promoted items doubled.
The long-term results were mixed.
The promotion boosted customer engagement, increasing the daily number of products customers viewed and their purchase incidence on the platform. The majority of shoppers were only targeted once with the shopping cart promotion, yet increased engagement persisted for six months.
On the negative side, the test group increased the proportion of items they put in their shopping cart, hoping for another discount incentive. The prices they paid for items decreased subsequently, “possibly due to their strategic search for lower prices,” according to the study.
Finally, the promotion drove to a spillover effect as those who had received the promotion sought out better deals at retailers not involved in the initial promotion.
In their recommendations, researchers urged those implementing dynamic pricing programs to take advantage of the shopper’s willingness to view products and spend time on a platform. For example, better personalized recommendations could turn increased browsing into conversions.
But retailers were cautioned to “understand the long-term costs of promotions due to customers becoming more strategic.”
Dennis Zhang, an assistant professor and co-author, told Olin Business School’s blog, “People are not just keeping stuff longer in the shopping cart, they’re becoming bargain hunters. They’re spending more time looking for deals, even before they put something in their shopping cart.”
The findings suggest offering “surprising promotions or deeper promotions” could amplify the positive effects of promotions on engagement without leading the customer to expect regular discounts. Retailers were also advised to be “cautious about the spillover effects” because competing retailers might adopt similarly promotional strategies and drive down prices overall.
- How Do Price Promotions Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba – Olin Business School
- Consumers can outsmart online discount strategies, study finds – St. Louis Today
- Olin study: The unintended consequences of tinkering with online prices – Olin Business School
DISCUSSION QUESTIONS: Does dynamic pricing only train online shoppers to wait for promotions or seek them out elsewhere? What advice would you offer retailers around optimizing dynamic pricing for the short and long term?