Should Purchasing Intent Be Used to Alter Prices?
Technology is increasingly available that enables retailers to alter prices on certain products based on customers’ intentions to purchase or not purchase other products. Researchers at the University of Arkansas label the practice "sequential pricing" and claim it can be highly profitable.
According to a new study from the university, sequential pricing occurs when a seller, aided by technology, is able to set the price for a subsequent product based on a customer’s interest in or preference for an initial product. The goods are usually complementary. For example, if a customer shows interest in a shirt, prices can be set for matching pants.
"Think about how shopping carts offered at most online stores work," said Cary Deck, professor of economics in the Sam M. Walton College of Business, in a statement from the university. "A customer clicks on an item to view information about it and decides to add it to a shopping cart or not. The mere act of selecting an item to consider, regardless of whether the customer purchases the item, provides information to the retailer. It tells the store something about the shopper’s taste and what other items may be of interest to the user. Stores can then set prices on those items accordingly, based on anticipated demand."
Beyond online, emerging technologies such as RFID can inform brick-and-mortar retailers that an item has been taken off a shelf or removed from a fixture, potentially allowing similar individualized pricing in the store.
The study, published in the journal Information Systems Research, indicated that a sequential pricing strategy worked better than bundling products and "pure" component pricing, in which a retailer simultaneously sets a price for goods that are close substitutes. Also, when customers’ values for goods were highly correlated — different books about baseball, for example — profits increased when a retailer was able to increase the price of a second product based on the customer’s decision to purchase the first product.
Not apparently explored in the study is whether altering prices based on buyers’ intent will be acceptable to consumers.
A new book, Attention All Passengers: The Airlines’ Dangerous Descent, by USA Today reporter Bill McGee, details "strong evidence" that shows airlines and travel sites are already changing prices based on an individual’s characteristics or buying history as part of an overall exploration of "dynamic pricing."
Beyond privacy concerns, the practice of charging different prices to different people may be discriminatory for the same reasons "ladies’ nights" have been banned in bars in certain states, Mr. McGee wrote in a USA Today column.
- ‘Sequential’ Pricing Can Increase Retail Profits, Study Finds – University of Arkansas
- Are You Paying More Shopping Online Than Your Friends? – Live Science
- Do travel deals change based on your browsing history? – USA Today
- Travel advice: Are airlines quoting different prices to different people? – Toronto Star
Should retailers alter prices based an individual’s purchasing intent? Do you think this practice would result more often in a complementary product’s price being raised or lowered?