Pricing changes & algorithms - a game of cat and mouse

You probably have the idea that you can use the power of the Internet to compare prices and find deals. Savvy travelers look for advice about the best time to buy airline tickets for a trip – on a Tuesday, about 90 days before the trip, right? You compare several hotel chains when you’re looking for a room. You know how to compare prices for day-to-day purchases. (Although you never do; you just buy from Amazon because it’s easier and the chances are that its price is good enough.)

The world is so much more complicated than we realize. Everything about pricing is being turned on its head.

Airlines use AI software to adjust prices on flights dozens of times per day.

Hotels display different prices for the same room on different websites, and rates fluctuate constantly and continuously.

Amazon changes product prices 2.5 million times a day, meaning that an average product’s cost will change about every 10 minutes.

The new AI-driven hyperdynamic pricing is another side effect of the collection of data by technology-driven companies. Algorithms can spot patterns that are not obvious without deep analysis.

There are two reasons that big companies will always have the upper edge to convince you to buy something for the most money that you are likely to pay:

  • Big companies have better information about the world and the rest of the market than you do. A consultant quoted by the New York Times: “Along with historical and seasonal information, the new A.I. systems scan the web for global news events, weather predictions, trending Google searches, social media posts, local event schedules and other factors that could affect demand.”
  • Big companies have so much information about you that they can predict your behavior more accurately than you can. Perhaps that is information specifically about you. Perhaps it is data about 100,000 or one million people who are just like you in all the ways that are relevant to your purchase at that moment. Either way, they’re in a position to tempt you with a price that is just at the upper edge of what you will agree to pay.

Businesses have always adjusted prices based on their best guesses of what would spur demand and produce the most revenue. Still, for many years we all believed in the concept of a list price. An article in The Atlantic describes it as a truce.

“The idea that there was a legitimate “list price,” and that consumers would occasionally be offered a discount on this price—these were the terms of the truce. And the truce remained largely intact up to the turn of the present century. The reigning retail superpower, Walmart, enforced “everyday low prices” that did not shift around.”

Price changes & algorithms

The Internet era introduced dynamic price changes and eroded the truce of the “list price.”

The New York Times published a long article last month about airline price changes. It reported: “According to research by the Montreal-based airfare prediction app Hopper, the average price of a domestic flight changes 17 times in just two days, while international flights change a dozen times in that span. Prices on high-traffic routes like New York to London can change up to 70 times over two days.”

The article includes tips about how to obtain the best prices, but many of them are not available to individuals. For example, corporate travel departments can sign up with services that automatically scan for lower prices on booked flights or hotel rooms, then cancel and rebook travel automatically.

Amazon changes product prices millions of times a day, based on in-depth analysis of customers’ shopping patterns, competitors’ prices, profit margins, inventory, and much more.  From Business Insider:

“One useful strategy Amazon has found is to undercut their competitors on popular products but actually raise the prices on uncommon products, such as by discounting bestsellers while jacking up prices on obscure books. The idea is that most people will just search for the most common products (which will end up being cheaper on Amazon), so they’ll start to assume that Amazon has the best prices overall. That’ll hook customers on Amazon and get them to pay more for the less-common things they’ll buy down the road.”

At one time, there were services that would monitor Amazon prices and alert you if a price dropped on an item after you purchased it, giving you the chance to ask Amazon for a refund of the difference. Amazon quietly dropped that price protection a few months ago, and you cannot get money back on Amazon purchases, even if the price goes down ten minutes after you click the Buy button.

Amazon’s behavior is influencing other sellers, both third parties using Amazon’s storefront as well as large retailers like Walmart and Target.

” Amazon, of course, has blazed the trail, with its algorithms that reportedly change prices millions of times per day depending on demand. According to Amazon’s website, prices for items can change — even after the customer has clicked “add to cart” — and Amazon can lower prices as part of promotions. Amazon can lower these prices even further to match any price at another retailer that undercuts an Amazon price for the same product. According to some reportsfactors that influence prices on Amazon, include demand, customer intent and pricing patterns from other retailers. According to Amazon, its retail prices change based on the company meeting or beating the lowest competitive price from other retailers, and fluctuate throughout the day. The company also said sellers set their own prices according to Amazon policies, and that it doesn’t use surge pricing, or pricing based on region or delivery location.”

It’s more difficult for brick-and-mortar stores to change prices regularly – the price is displayed on a shelf tag, and it’s difficult to change those quickly. But Walmart and Target have adapted and are engaged in the same dynamic price changes in their online and mobile apps, so you might find prices are quite different in the Target mobile app than what you see displayed in the store. (Until it was caught a year ago, the Target mobile app tracked your location and showed low prices until you pulled into the parking lot of a store or went inside, at which point prices in the app would jump up. A marketing professor described it this way: “The most reasonable explanation is that you just revealed your commitment to buying the product, you’re in the store, or in the parking lot. If you are further away, you haven’t quite committed, so I’m going to give you a juicier deal. That’s why the price went up when you got closer to the store.”)

None of these companies – airlines, hotel chains, retailers – want you to feel gouged! The best result for everyone is when you believe you got a deal. Amazon might offer you a discount based on your shopping habits and history if that will help you be satisfied and help close the sale. You’ll never know that at the same moment, ten thousand other people were offered an even larger discount. Remember, the best con is when the victim never realizes they were cheated.

You can and should still try to obtain the best price on every purchase. But be aware that the cat tends to win contests with a mouse in the real world.

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