Internet exposes variable pricing strategies

Home Channel News, June 5, 2000 by Don Longo

In brick-and-mortar retailing, they call it geographic pricing. Home Depot's stores in the New York metro area might charge more for a particular product than a store in hotly competitive Dallas.

The equivalent in the Internet world is "dynamic pricing." According to a report on CNET News.com last month, Amazon.com recently annoyed many of its customers when they found out that the Internet retailer was offering different discounts to different customers who wanted to purchase a popular MP3 player.

This marketing practice was spotlighted when customers comparing prices on a bargain hunter message board discovered Amazon was randomly offering the same MP3 player for up to $51 off its usual $233.95 price.

According to CNET, Amazon admitted that it is likely one customer may pay a much lower price for an item than another. Analysts called the practice common on the Web and indicated that dynamic pricing may be the future of e-commerce.

For example, price-conscious consumers could get lower prices, while people who demand high customer service could pay higher prices but receive longer warranties and express shipping for their items.

Dynamic pricing is not that different in concept than the brick-and-mortar practice of charging different prices to different customers based on geography. However, the ease with which customers can electronically compare prices on similar models and products leaves retailers vulnerable to customer backlash.

As far as I can tell, Home Depot will become the first retailer to offer geographically variable pricing over the Internet when it launches its transactional Web site in the Las Vegas market some time in the next four weeks. Local customers will be able to order products priced the same as in Home Depot's Las Vegas stores. As the program is rolled out market by market, the Internet pricing will match the prices at the local market stores.

Ken Cassar, a digital commerce analyst at Jupiter Communications, applauded Amazon's pricing test. "I believe pricing will increasingly become personalized," he said.

That may be true, but many customers are still going to feel ripped off.

"I dislike it, the thought that someone else is getting a better price than you' said an Amazon customer from Rochester, Minn.

I suspect most consumers understand that companies will offer discounts to frequent customers or charge more for providing additional services. However, the randomness of dynamic pricing is sure to upset many customers. Similarly, the nature of the Internet throws a spotlight on geographic pricing, which may engender similar feelings of mistrust in consumers.

There's a lot to like about Home Depot's e-commerce plans (see story, page 9), particularly the emphasis on meeting the needs of pro customers and the ability of stores to serve as staging areas for customer pickup of online orders. It will be interesting to see customer reaction to this geographically variable online pricing policy.