Variable Prices: An Idea That Flies

From the Los Angeles Times, Wednesday, March 13, 1991

Imagine a market where the same item rarely costs the same amount twice, and the amount actually paid depended on externalities such as the date of purchase, the identity of the purchaser and the reason for the purchase.

It sounds exotic, but this describes the airline industry, where there is practically no such thing as a “standard” fare. It is a good thing that passengers rarely compare tickets–adjacent seats on a typical coast-to-coast flight can vary by as much as 50%. As promotions multiply and “frequent flier” programs become more complicated, it seems that there are as many fares as there are passengers.

Now imagine encountering the same complexity in your neighborhood market or retail outlet. The price you pay for a box of cereal could be different from that paid by the shopper waiting in line behind you.

Why the break? Perhaps you are a member of the market’s “frequent buyer” club, or you simply used a coupon printed out with your receipt on your last visit. Perhaps your credit card company is running a promotion with the cereal manufacturer, offering a discount for the purchase reflected as a credit on your next statement. Perhaps you got the discount even if you paid in cash–but only after filling out an information card providing the market with data about your buying habits and preferences. All of these examples are drawn from retail experiments being conducted today. Retailers are just beginning to install computer systems at the cash register and in the back room for inventory control Just as the installation of electronic reservation systems enabled airlines to offer vastly complicated rates, new checking systems invite customized retail pricing.

The innovation is most apparent in large video rental chains. The computers used to keep track of videotapes can also easily follow the buying patterns of “video club” members–customers encouraged to return again and again with the offer of repeat discounts. Repeat customers leave behind a trail of buying preference information that may be as valuable to retailers as the cash changing hands at the register.

Supermarkets lag behind leading-edge video retailers when it comes to tracking individual customers, but this has not stopped them from turning purchase information into a valuable commodity. Aggregate “scanner data”–sales information collected from checkout counters–is a valuable commodity sold to consumer product manufacturers and others, who combine it with neighborhood demographic information in order to better predict public buying habits. The income generated by preference information invites further pricing complexity, as retailers tailor their systems to encourage consumer information capture.

The net effect could favor large retail chains over smaller independents; large companies are more likely to afford the substantial investment in the required computer systems. Moreover, “frequent buyer” programs could discourage smart shoppers from store-hopping for bargains offered by competitors, thus isolating small retailers who count on specials to attract new customers.

Of course, customer sophistication is likely to grow in step with advances in retail technology. Buyers will quickly realize that “discounts” and coupons amount to compensation by retailers for information on their personal purchase habits. Consumer advocacy groups are likely to seek measures protecting consumer privacy and may even advocate larger premiums on the theory that stores are not paying customers enough for purchase information.

Retail pricing is unlikely to disappear, but complexity akin to air fares today could be more than a curiosity before the decade is out. To the question, “What does it cost?” retailers may soon answer, “Well—it depends….”