The American consumer is back for the first holiday season since 2007. But while shoppers are hitting the malls, they're also being choosy—and comparison shopping is more easily done online. Web sales will rise 11 percent in November and December, according to ComScore, compared with about 3 percent for sales in bricks-and-mortar stores. Online shoppers can get better prices and perks like free shipping. Online merchants, however, are not exactly defenseless. One way they fight back against picky customers is through "dynamic pricing," also called "discriminatory," "personalized," or "variable" pricing. And, for the most part, customers have no idea it is happening.
In its most brazen form, it works like this: Retailers read the cookies kept on your browser or glean information from your past purchase history when you are logged into a site. That gives them a sense of what you search for and buy, how much you paid for it, and whether you might be willing and able to spend more. They alter their prices or offers accordingly. Consumers—in the few cases they recognize it is going on, by shopping in two browsers simultaneously, for instance—tend to go apoplectic. But the practice is perfectly legal, and increasingly common—pervasive, even, for some products.
Sellers of time-sensitive, highly price-variable goods (think airline tickets, hotel rooms, or car rentals) do it all the time, somewhat openly. If you have ever had the annoying experience of buying a plane ticket through a portal like Kayak, then seeing the final price jump $10 or $40 at check out, you have probably found yourself on the receiving end of dynamic pricing.
Banks do the same for products like mortgages and credit cards, where prices change depending on everything from the customer's credit rating to the manager's whims to what browser the searcher uses. This August, the Wall Street Journal reported on a company that helps Capital One determine what credit-card deals to offer customers when they land at the site. The deals change depending not on any credit-rating or salary information given to the firm by the customer—just on information skimmed off of their computer before the page loads. More recently, bloggers caught the bank offering different deals to users using different browsers. (Chrome users demand better deals than Firefox users, FYI.)
Online retailers also alter prices, deals, and offers on regular goods that do not traditionally have much price volatility. Groups like Consumers Union periodically track shopping sites to see how and how often they change prices, and find fairly frequent instances of dynamic pricing. "While surfing Barnes and Noble's site, we selected a new hardcover book," the watchdog noted in a 2007 investigation. "[We] placed it in our online 'cart' at a cost of $20.80. We added several other books as well but didn't finalize the sale. Two days later, using the same browser, we found the cart had been emptied. We selected the same titles…[it] now cost $26.00."Ditto for shoes on Zappos and a number of other products.
It is impossible to know exactly what stores change prices for customers after they have clicked to put a product in their shopping cart—or which stores change a price on a customer depending on their browser or cookies. Shoppers despise the practice, understandably, so stores rarely cop to it unless caught red-handed. But many offer disclaimers implying they are aware of price discrepancies. Pottery Barn, for example, answers the question, "Why is the price of an item in my saved shopping cart different from when I selected it?" on its site. The answer? "Prices are subject to change—including temporary reductions as well as permanent increases. The prices of items in your cart represent the current price for which you will be charged." In short: Dynamic pricing.
The practice, if mysterious, is not new. Mega-retailer Amazon offered the same DVD for different prices to different customers in 2000, creating a public-relations disaster. The company claimed it was performing A/B price testing—seeing how many more folks would buy the DVD at a higher price—and said it would always give all customers the lower price at sale. But the incident fostered widespread concern about dynamic pricing, and spurred the first thorough study of the practice.
Concern about dynamic pricing resurged in 2005, when the University of Pennsylvania's Annenberg Public Policy Center published a much-ballyhooed paper, entitled, somewhat provocatively, "Open to Exploitation." Researchers conducted a 1,500-person survey and found about two in three respondents did not know it is legal "for an online store to charge different people different prices at the same time of day." About 70 percent did not realize it is also legal for bricks-and-mortar stores to do so. But yes, as long as stores do not discriminate based on age, sex, location, or a few other characteristics, stores can price as capriciously as they want.
Fears aside, how pervasive is the phenomenon? How does it happen? And what can customers do about it?
The truth is, even retail analysts, academics, and industry groups do not have a good sense of the scope of dynamic pricing—not so much because of a lack of interest, but because companies aren't forthcoming about how they price online. A 2000 Forrester Research report found "most merchants feel pressure to compete on price online and are testing a mix of strategies to appeal to price-conscious consumers," but has not followed up in recent years—despite the explosive growth of online shopping and the growing sophistication of the Web marketplace.