How closely should you eye your online shopping cart?
Online shopping has been convenient for more than just shoppers, who no longer need to leave their computers. For retailers, the Internet allows them to change prices in an instant. And yet, they don’t. Or at least they haven’t yet adopted this as a widespread practice.
That surprised economists. A new National Bureau of Economic Research working paper analyzed daily prices of more than 27,000 online retailers and more than 50,000 goods from May 2010 to February 2012, using information from a global shopping site with multiple sellers (think pricegrabbers.com or Google Shopping.) The data the researchers used also provided click rates, or how often a shopper looks at a particular product, to find if more popular products change price more often.
The results? Online prices do change more often, but still experience major stickiness despite fewer physical barriers.
Researchers found that online prices stayed the same for anywhere from seven to 20 weeks and that, in general, price spells can be up to two-thirds shorter online than in brick-and-mortar stores. Yuriy Gorodnichenko, one of the three authors and an associate professor of economics at University of California Berkeley, said the results surprised him because online prices could be changing “every minute,” when in reality, it generally takes weeks or months, both in stores and online, for prices to move.
In physical stores, there are two reasons behind price stickiness: the physical cost of changing price tags and the cost of finding competitors’ price points. The same burden does not exist in the online shopping world, or at least not at the same high costs.
So why the rigidity? The researchers suggest there are other factors at play here besides just “the conventional nominal costs of price change.”
Indeed, institutional reasons, says Eric Anderson, a pricing expert and a marketing professor at Northwestern’s Kellogg School of Management, have a lot to do with price stickiness. Retailers, in stores or online, just aren’t built to change prices often.
From supermarkets to department stores, prices are often planned well in advance and are based off of manufacturers’ pricing requirements (especially durable goods that come attached with minimums for advertised prices), seasonal sales and inventory.
Additionally, if a good isn’t selling quickly or is selling out, a new, perfect price is rarely obvious. “‘How much did we sell at a specific price’ is all they know,” Anderson said. “They don’t get information about how to diagnose what to do, so the status quo tends to win.”
And if retailers do want to change prices, they can’t do it quickly, said Jean-Manuel Izaret, a senior partner at Boston Consulting Group and the company’s global leader on pricing.
Additionally, he explained that even though finding a competitors’ price online is easy in theory, stores may have millions of prices to observe and often not enough people or sophisticated software to track them.
There’s one more factor that keeps businesses from changing prices regularly: customers. The airline and hotel industries are among those best known for using dynamic pricing, the industry term for pricing based on market demands.
But that doesn’t always work for stores, where customers interact with price tags more intimately. “Even with digital displays, if the price just flickers, it’s a terrible customer experience,” said Guru Hariharan, CEO of Boomerang Commerce, a pricing platform that helps online retailers find and analyze competitors’ prices and change their own accordingly.
At the same time, dynamic pricing is used to attract customers, and may soon go beyond airplane and hotel pricing. Amazon, which can use more experimental pricing due to its online-only shopping platform, is often able to attract, and keep, customers because of their reputation for prices lower than their competitors’. Customers don’t even spend time comparing prices, said BCG’s Izaret. “They trust Amazon to have the right price.”
In the next 10 years, Izaret said, as data and price tracking systems improve and are more widely used, customers may see increased dynamic pricing online. Hariharan, of Boomerang Commerce, said that expansion may happen even sooner; he expects daily or even multiple price changes per day within three or four years.
But companies will have to find the sweet spot between low and stable prices if they’re to avoid the aggravation customers so often feel toward airlines and hotels with frequent price swings. “Retailers will have to answer the question, ‘how dynamic do we want to be?’ once a day, once every 15 minutes,” Hariharan said.
While more dynamic pricing may be good news for shoppers and retailers, online small businesses may soon find themselves even more pushed out than they are now. Already, major retailers dominate online shopping. According to Internet Retailer Magazine, more than 80 percent of total online sales is done by the top 500 retailers, including Target, Wal-mart and Macy’s. To keep up online, small businesses may focus instead on the other two pegs that attract customers: product assortment and customer service. There’s only so long they can compete, however, if their prices cannot meet consumer demand.
But regardless of the size of the retailer, as dynamic pricing software grows, customers may want to eye their online shopping carts a little more carefully.