Slashdot Mirror
Dynamic Pricing Returns
TwP writes: "That new computer will cost you $1,200 - wait no $1,300 - better make that $1,500 dollars! IBM, Compaq, and Dell are experimenting with "dynamic pricing" according to this article over at InfoWorld. Amazon tried a similar idea last summer and met with quite the negative response. Hope the computer makers can spin this idea in a better light." Amazon's experience didn't work out, and as far as I know, they've ceased doing it.
Look at auto sales, you get a different price for the exact same product from different dealers! GM's Saturn division is using this practice as a way to entice customers who don't want to deal with this.
[ Full disclosure: I work for a company that writes software to support "dynamic pricing" on web sites. ]
What would be good from the customer perspective is if websites actually provided some pricing rationale and history. You could click on an item's price and see that yes, it is $100 more expensive today than yesterday, but that's because the price of RAM has just gone up, say.
Otherwise, pricing is just a black box and customers have no way of knowing if they're being discriminated against.
Of course, there are tools to help customers compare prices across web sites, so in an absolute sense, it's not a problem. But vendors would be wise to consider the impression that these things leave on customers. If I want a Thinkpad specifically, I can't go to anyone but IBM or an IBM dealer to get it. If I suspect IBM is playing funky games with pricing, I may decide I'm better off with someone else.
In short, transparency is a good thing, in pricing as in many other areas.
Quaker merchants pioneered the idea of a single price for all buyers. Prior to that, only a competent negotiator could get a good price on something. So you couldn't send a child to buy something at the corner store.
So in time, people sought out Quaker merchants, because they knew they would get a fair deal.
-russ
Don't piss off The Angry Economist
Maximising profit is not the same as getting the highest profit margins.
A simplistic example: You are a carpenter that can make 5 custom cabinets a week and materials cost $100 per cabinet. Experience has shown you that if you price your cabinets at $500, you have a profit margin of $400 per cabinet and will only sell one a week for a net profit of $400 per week.
However, if you drop your price to $250 you can sell 5 a week. This drops your profit margin to $150 yet increases your total profits to $750. With the first pricing, you maximized your profit margins. In the second, you maximixed your profits.
I feel like picking a fight with everyone who thinks they are right. - Rainmakers
So while you might get annoyed, they still have your cash. You get hot and bothered, annoyed.. so you need another Coke. Well come to capitalism.
An Eye for an Eye will make the whole world blind - Gandhi
I run a computer parts store. When the price that I have to pay for things such as RAM and Processors goes up, I up my price...when they go down, I lower it. My price sheet changes every day, as does my website. I really don't see the problem with this from an economic standpoint. They are making all the money they can. As a consumer, if you are willing to pay that price for the server, then you will.
OTOH, if there isn't a great demand for the product you want, they this will help you get it cheaper. When less people want to buy it the price will automatically go down! It's just all in how you look at it!
------ This has been provided as a public service! ------
When Amazon did it they gave different prices to different people based on thier individual actions within the site based on cookies. This new system for changing the price of computer equipment is based on inventory and many other factors that arn't really related to the user's actions. To me this seems much more fair that what Amazon did.\ =\=\=\
=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=\=
--
-- @rjamestaylor on Ello
This is so bad IMO.
Anyone ever been to public parks.
Its the heat of the summer and your drenched in sweat desperately seeking a bottled water or coke machine because you forgot your drink.
You spot a coke machine and a bottle of coke (20oz of liquid) costs 3.75?!!?!?
Yes they call it "contextual pricing" just like from the article right? *cough*
Yet in the winter that coke costs oh say a mere 75 cents.
What gives?
The coke machines have thermometers in them and they jack the price up as the temperature increases / decreases.
How lovely.
When you are talking thousands of dollars this just is NOT going to work out. The backlash would be even more severe! Were no talking 5-10 bucks were talking 100-500 bucks here! Owch.
Id be annoyed enough about something like that.
Jeremy
IMHO, this isn't a bad thing. Prices on computer components generally (but not always) tend to fall. This just means that your system supplier isn't overcharging for parts because they haven't updated the price to reflect the new wholesale cost yet.
IIRC, the furor over Amazon's dynamic pricing scheme was mostly because Amazon wanted to offer different customers different prices for the same item.
The issue here is not that dynamic pricing is good or bad, but, how to implement it in markets where it has not previously been used.
The idea here is for companies to be able to sell to customers they would not otherwise have rached, by selling their product at a price the customer is willing to pay. For example, Dell sells a particular model of computer at $1500. At that price they may have 20,000 customers. Now, how about the next customer? There has cot to be a customer willing to buy the computer if only it was sold for $1,499. How many customers who would not otherwise have bought this model of computer, are now buying at the new price? This might bring in another 150 customers. Now, would it have been cost effective for dell to sell all 20,150 computers at $1,499? No They would have been losing almost a quarter of a million dollars in potential revenue ($244,850 to be exact). You can not reasonably expect a company to willfully choose to forego that revenue, and in order to generate that revenue when selling at the lower price, they would have to sell to another 163 customers - where in our example there are only 150 customers who will buy at the $14,99 price. In fact, that quarter of a million dollars in projected revenue might be the deciding factor in weather or not to produce this model of computer. This is an example of marginal revenue - which would have been simplified with graphs, but ayway...)
Now, lets look as the consumer/social value in this proposition. 150 users who would not have bought a Dell computer (of a certain quality) now have done so, thus enhancing their lives (to whatever degree having a Dell computer enhances your life).
I realize the numbers in the above example are way off, but it serves to demonstrate my point about marginal revenue. If the company could not make a predetermined percentage of proffit from the sale of this model of computer, they simply would not bother to sell it. This would negatively impact 20,150 consumers who would not have the opportunity to buy this Dell computer.
Marginal pricing and marginal revenue have been counted on for years in numerous industries, for example, when pricing gasoline. Oil companies charge different prices to gas stations in different parts of the country, and even different parts of a city. YOu can go to a bad neiborhood and get gas more cheeply than if you go to the good neiborhood. Interestingly, the net proffit made on the sale, by the independant gas station owners in this case might actually be exactly the same. Oil companies use a complex dynamic pricing model to determine the price at which gas is sold to various different gas stations. This has been the case for 50 years.It's only when dynamic pricing becomes visible to consumers on a one to one basis, are there any objections.
Not to put too fine a point on it, but we have been conditioned to believe that we have the right to be charged the same price as the next guy, for goods and services that we buy. This is simply not the case.
--CTH
--
--Got Lists? | Top 95 Star Wars Line
except when it's in retail sales. The price of 1,000,000 chips will vary from day to day. It also varies with the size of the order and with the seller's previous experience with the buyer. Dell and IBM are dealing with variable prices everyday with the stuff they buy. There was a time when every retail sale was negotiated -- if you wanted to buy one potato, you'd have to pick one out and argue with the grocer about the price. Some people enjoyed haggling, some hate it, but in any case you can waste a lot of time that way -- and if the grocer stands there negotiating with you for 10 minutes, he's going to have to make up the lost work time in higher prices somehow... So in the USA for a century or so retail sales have mostly been fixed price, except for items like cars and houses where there's enough money at stake to be worth it.
But computers make it easier to move back to a system where the price not only changes every few hours, but also depends on the seller's impression of the buyer, or some substitute for that. For instance, in buying an airline ticket you'll see a wide variety of prices for the same service -- the point being that if you are desperate to find _some_ flight going the right way at the right time, or are so rich that hunting through the mess isn't worth your time, the airline can get $1,000 out of you, while if you can go anytime and you put enough effort into looking up prices, you might spend $400 for the same seat.
But dynamic pricing does bother Americans, and I think it is worse when it's done by computer, since you can't haggle with it. In the old days, the ultimate argument was like "You only charged Mary Beth 3 cents for a potato this morning", and you'd either get a 3 cent potato or some (possibly valid) reason for the increase: "Her potato was smaller", or "I wasn't running out of potatoes this morning." But Amazon's computer would charge you a different price than it charged your friends, with no explanation and no one to listen to your complaints. That you could log in twice and get wildly different prices yourself just made it worse.
IBM and Dell are doing just partly dynamic pricing: changing the price as often as the price of parts or the load on their assembly line changes, but charging everyone ordering the same system at the same time the same price. It can get people a little confused, but it's not like Amazon's system. There is one thing that is crucial to keeping customers happy when you change prices frequently -- you give them a firm quotation that is good for a certain time period. If you look at Dell and the computer you want is $1,095 now, then go to other vendors to check prices, and when you come back to Dell it's now $1,195, you are quite likely to prefer the guys that have been quoting $1,200 all along. So what Dell should do is to give you a way to lock in the first price for a few days if their prices go up. I don't know if they are doing that or not -- but they'll lose customers if they don't.
Really, this is nothing new. The retail term for what we're talking about is "Zone-Based Pricing." It's the same thing as when I go to McDonald's in Boston and pay $4.35 for the double cheeseburger combo, and in Nebraska I pay $3.25. It's just that there is a cost-of-living difference that retail chains will definately take advantage of.
Case in point, Staples.com. Nobody mentions it much, but Staples has zone-based pricing, not only in the stores, but now it has been implemented on their website. Didn't you ever wonder why they ask you for your zip code before you can browse their selections? It's because they will charge you different prices based upon your living area.
capitalism, capitalism.