Retailers could improve consumer comfort with dynamic pricing practices by adopting and promoting a Pricing Bill of Rights that offered consumers visibility and rights around how their products are priced.
A long car ride and an passionate debate
I was crammed in a car to Tahoe last week when the conversation turned
to price optimization (clearly, it was a long ride), the technique that companies like airlines, hotels and rental car companies use to change prices to optimize profit and revenue. My skiing companions were both in technology: one was an outside sales exec, and the other was an senior engineer.
A few things about the conversation surprised me. First, the level of familiarity was surprising for a niche science. Everyone had a story to tell: how Dell was offering different prices to people visiting their website via different channels, how United was offering different prices for the same seats at the same time, how Amazon changed the prices according to the customer’s profile. Second, while I was not surprised by the generally negative opinion about dynamic pricing, I was surprise by the length and passion of the debate. It was an emotional issue.
Not everyone objected to every dynamic pricing practice. They didn’t mind that airline prices started cheap and rose as the departure date got closer, and recognized this rewarded folks for planning early and ensured that seats were available for those that booked late. What they hated was knowing that another person calling in at the same time could be getting a different price.
The core objections
It seemed that some pricing practices were acceptable and others were not, so I probed a bit further and asked them to be specific about what they disliked. The following objections emerged as the core problems:
- “I hate thinking that other people are getting a better price.”
- “I hate knowing the price will probably drop immediately after I purchase it”
- “I hate that the company (my provider) doesn’t give me the best deal”
- “I hate that not knowing why/when/how the price is determined”
Their complaints reminded me of the consumer backlash to Amazon’s dynamic pricing experiments in 2000 and 2001, chronicled in the San Francisco Chronicle
One man recounted how he ordered the DVD of Julie Taymor’s “Titus”, paying $24.49. The next week he went back to Amazon and saw that the price had jumped to $26.24. As an experiment, he stripped his computer of the electronic tags that identified him to Amazon as a regular customer. Then the price fell to $22.74.
Fair pricing principals emerge
It seemed that each of these objections could be addressed with tactical mechanical fixes, and we walked a few potential solutions to address the complaints.
- What if the vendor guaranteed all people received the same price? (“Equality”)
- What if the vendor guaranteed a refund if the price dropped following the sale? (“Fairness”)
- What if the vendor always offered you the best deal available? (“Loyalty”)
- What if the vendor clearly explained how the price was derived? (“Transparency”)
The general response was positive, so we walked through the following thought experiment: You visit Amazon’s site, and look up a bestselling DVD. The price is $22.43, and a chart shows how that price has fluctuated over the last year. You are assured that the price you are receiving is the best price Amazon has at that time, and the same price all other users receive. You are also guaranteed that if the price drops in the next year, Amazon will credit the difference to your next purchase.
Now, the folks in the car were generally pleased, and it seemed that promoting these ideas (Equality, Fairness, Loyalty, Transparency) as general principals of dynamic pricing could go a long way to easing consumer uneasiness with the concept.
Still, even as folks were voicing their approval, an unspoken discomfort remained. We had identified all the objections and proposed mechanisms to address each one, but the uneasiness persisted. It seemed the discomfort was on a less rational and more emotional level, and one of the passengers summed it up best:
“I can’t explain it exactly, but when they are change
the price, I can’t help the feeling that I am getting taken advantage
of, that I am getting screwed.”
The lack of trust is stunning, and our retailers bear the responsibility for the adversarial relationships they’ve built with their customers, where each move is greeted with distrust and suspicion.
It stands to reason that retailers with strong customer relationships and higher levels of trust will be in a position to implement dynamic pricing, while those with weaker relationship and brands will have difficulty managing any backlash. At the same time, establishing a set of fair pricing
principals, a Pricing Bill of Rights, could go a long way to managing consumer uneasiness with dynamic pricing practices. In practice, it might look like this:
A Pricing Bill of Rights
We change the price of our products to adjust for supply and demand and to match what our customers are willing to pay. In an effort to maximize revenue and profit, we sometimes increase prices with the understanding we will sell fewer items, and often decrease prices with the understanding that we will sell more items. In all cases, we believe in fair pricing that
respects our customers, and abide by the following pricing principles:
- Equality. We treat our customers equally, and offer you the same price as every other customer.
- Fairness. We protect our customers. If price drops suddenly, we credit the difference to your next purchase.
- Loyalty. We are grateful for our customers support, and offer our customers the best price available.
- Transparency. We respect our customers, and explain to our customers how the price is derived.
This idea is not unique, several industries have attempted to publish and promote a bill or rights in the last few years, with varying degrees of success :
- Data Portability is a effort bhy a group of internet companies (that include heavyweights Facebook, Google, Plaxo, LinkedIn, Flickr, SixApart) to promote the capability to control, share, and move data from one system to another. The group frequently references principles (transparency, portability, editing, anonymity, use, value, permission) described by John Battelle in his Data Bill of Rights.
- Attention Trust is a not-for-profit organization that puts the user in control of their Attention data. The group publishes a set of four principles (Property, Mobility, Economy, Transparency) that guide the responsible use of attention data.
- WOMMA is the official trade association for the word of mouth marketing industry. WOMMA’s mission is to promote and improve word of mouth marketing. The group publishes a word-of-mouth ethics code based on honesty of relationship, honesty of opinion, honesty of identity.
- DigitalConsumer.org’s goal is simply to restore the balance of
copyright law so that artists and creators can prosper while citizens
have reasonable flexibility to use content in fair and legal ways. The group publishes and promotes the Consumer Technology Bill of Rights.
In these examples, the goals of the organization have differed. Data Portability and Digital Consumer were both formed to build a coalition of support to prevent large companies from locking in consumers, squelching competition, and limiting the growth potential of other companies in the space. While Digital Consumer has disappeared from the radar, the Data Portability movement has gained great momentum; even the large companies that threatened to lock consumers in (Microsoft, Facebook) have had to join the group and begrudgingly start opening up.
In contrast, Attention Trust and WOMMA were formed to minimize consumer backlash and guide the behavior of companies that could scorch the industry for all involved. By publishing and promoting a set of principals, both organizations (driven by the companies in the industry which supported them) sought to legitimize otherwise questionable practices. In this case, while Attention Trust has disappeared from the radar, WOMMA has been quite successful, attracting a strong coalition of companies and putting a reputable face on word-of-mouth techniques.
A Pricing Bill of Rights would fall squarely in this latter camp, establishing best practices to steer companies in the space away from behavior that could create consumer backlash that sinks all ships, and establishing a set of principals that help drive consumer comfort with the general practice of dynamic pricing.
Lost revenue = regret
While a Pricing Bill of Rights could ease consumer unrest with dynamic pricing practices, the principals will also blunt the impact of the techniques, and limit the ability to optimize revenue and profit. If a vendor needs to
offer the same price to everyone, they are undoubtedly leaving money on
the table from consumers that they know would pay more. If the vendor
guarantees a refund if the price drops following the sale,they are leaving more money on the table (although a vendor could account for these refunds in the calculation of price and drop prices more modestly, to limit the lost refunds).
Bottom line:A Pricing Bill of Rights could help retailers introduce dynamic pricing and mitigate consumer backlash. The associated rights of Equality, Fairness, Loyalty and Transparency would limit some of the advantages of dynamic pricing for retailers, but still provide compelling advantages.