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Data, Dynamic Pricing and Upsell: The Great Retail Store Mystery

Last November, of all companies opened a brick-and-mortar book store near the University of Washington in Seattle. Rumors emanating from the commercial real estate industry hinted that many more may follow (although Amazon has remained coy on the subject). Naturally, this has led many online to question “why bother”?

First, a few details on the store “experience.” Unlike Apple or Microsoft retail stores, the Amazon store doesn’t seem focused on creating a larger brand statement. The vibe has been described by some as closer to your-old school mall bookstore chain than even a Barnes & Noble. Here’s where it gets interesting though: none of the books on display in the store show a price. In order to get pricing, you have to scan a barcode with the Amazon smart phone app.

Most theories on this move trend towards the mundane. This article in The Atlantic covers the basics: moving into Walmart’s space as Walmart tries to move into theirs; sales tax (no longer a margin differentiator for Amazon in most states); or maybe running a trial for market share in airports/train stations, the one area where brick-and-mortar book sales are surpassing expectations.

However, Forbes’ Rob Salkowitz has a more outside-of-the-box take, as expressed in this article and an NPR radio segment recently. What if this foray has nothing at all to do with retail sales per se and is more about data and cross-sell/upsell?

Think about it. By scanning book prices with the Amazon app, the company is able to simultaneously serve up the wealth of data it already has on that customer: content preferences, buying behavior, and everything else its algorithms use to cross-sell and upsell customers on a regular basis. While for now is claiming that pricing is uniform for all items in the retail store, there is no reason the company couldn’t start to offer incentives to make sure customers don’t walk away empty-handed (and hopefully order some data-driven recommendations from their phone at the same time).

As Salkowitz states in his Forbes article: “Amazon may eventually offer you a personalized price that represents the company’s best guess at what you’d be willing to pay, based on what it knows about you and the context in which you are shopping (for example, is it holiday time, or close to a loved-one’s birthday?).”

Compass with needle pointing the word best price. Conceptual 3D render image with depth of field blur effect for uillustration of prices comparison.

There’s something to chew on. To date, B2C dynamic pricing has been driven more by aggregate demand for certain products or services at certain times and locations with certain conditions and not as much by individual buying behavior. In the sports world, Red Sox vs. Yankees tickets command a higher price than Red Sox vs. Rays for obvious reasons. Airline seats are more expensive during the holidays due to higher demand and the need to satisfy family commitments. How will consumers react if they know that the person next to them on the train may be getting a product at a discount because they are historically more frugal or less impulsive buyers? During the NPR segment, the age-old practice of haggling at the bazaar was invoked to suggest that this type of personalized dynamic pricing is nothing new. One could also argue though that in a bazaar, the seller is not armed with reams of customer behavioral data and therefore the buyer is at least competing on a level playing field.

In B2B sales, the dynamic (pun intended) is a bit different. Using data science to determine a price that is fair to the buyer and profitable for the seller can reduce sales friction and deliver the products and services businesses need faster. In this environment, where transactions are usually far more complex, list price is often not adhered to, and time is money for both parties, price optimization is not a controversial practice.

For individual consumers however, the jury is still out. Dynamic pricing from airlines is well established, and people are warming up to (or at least passively accepting) surge pricing for events and ride-share services such as Uber. How they will respond to this next step — highly personalized pricing — is anyone’s guess. If this is indeed what Amazon is up to in its brick-and-mortar adventure, any success — even minor — would be a potential game changer for retail sales.

As Salkowitz succinctly puts it: “You know who’d like to be able to do that? Every retailer everywhere.”

No kidding.

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