Digital individual pricing makes microtargeting practicable for e-commerce providers. They can set their prices individually for each online shopper, based on location and likely purchasing power, time of day and probable mood for shopping, category preference and interest in the goods. Does this make the consumer a roulette ball at the great e-commerce casino?
Pricing is a central function in the marketing mix. Pricing guides the value of product brands. The right pricing point determines sellout, sales, profitability. Traditional price research identifies price expectations, price limits and price corridors which provide orientation for marketing and distribution.
Like so many things, traditional price research could face a challenge from digital change, as e-commerce offers new opportunities for digital individual pricing.
What does this mean, specifically? Online suppliers can directly anticipate the individual price acceptance of customers, and adjust the price accordingly. If, for example, someone is using an Apple iPhone to order, they are probably willing to pay a higher price than someone using an Android cellphone to order. If you’re sitting in an internet café in an immigrant district in Berlin Neukölln and booking a trip (the IP address will show this), you’re offered a lower price than someone booking the same trip from a smart part of the city like Charlottenburg or Grunewald.
The possibilities of digital individual pricing are virtually unlimited in the Big Data age. Individual user profiles show which groups of products and brands people are particularly ready to pay for. Willingness to buy can also be predicted on the basis of day of the week or even time of day. Many customers are particularly ready to shop on Friday evening, others during the afternoon break at the office, at three o'clock on Tuesday.
Undoubtedly, the algorithms will occasionally misfire, and some basic laws of “general pricing” won’t be supplanted by “individual pricing". Even so, digital individual pricing will lead to a shift in some basic market relationships.
The power the consumer just recently acquired in digital consumption – the ability to compare at will and make use of the high degree of price transparency – is becoming illusory. Consumers continue to believe they are getting an objectively favourable price, or even the best price. In reality, however, without their knowledge, they are being offered a price which is tailored to their personal profile.
This is the continuation of a market trend which has been gaining ground for decades – the shift in price as intrinsic value to price as market price. What exactly does this mean? Traditionally, customers understood a price as being based on associating “value” as the price of products and brands with their intrinsic value. Production of a suit involves the costs of the specific materials and fabrics, the work of the designer, and a given number of hours of labour of the garment workers.
Pricing based on the alternative view of price as the market value takes a very different form. Depending on the demand and the consumer's eagerness to own it, and how eager the supplier is to sell, the same suit can cost EUR 100 at C&A and EUR 200 at P&C.
In modern retailing, the market price is often completely divorced from the intrinsic value. For example, there are Ryanair flights for EUR 10 – which supports the brand story, but doesn’t cover the cost of kerosene – and ripped T-shirts from Italian designer labels for EUR 500, which has nothing to do with design, production and material costs, and everything to do with the desire to own the exclusive brand.
The consumer has long since become accustomed to the idea that almost everything is available at almost any price – and this has been a steady driver to the expansion of e-commerce. Acting as a personal broker, with the ability to keep thousands of outlets in sight, the consumer has acquired extraordinary power to benefit from price differences in a world of market prices.
In one of our in-depth interviews, a subject once described this increase in power in this way: “E-commerce is like roulette – except that you always win and never lose.”
If consumers become aware of the possibilities of digital individual pricing (through critical reporting, consumer protection organisations etc), we can expect that the sense of the customer as king of e-commerce will suffer a grave shock. They may then come to feel like the roulette ball in the impenetrable price casino of e-commerce.
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