Price Discrimination in Online Shopping

Pablo Valerio, International Business & IT Consultant | 5/2/2013 | 27 comments

Pablo Valerio
Every grocery shopper knows that supermarket chains have been applying "zoning" for many years, and there is a significant price difference depending where you shop.

But online retailers, including Amazon, Best Buy, and Staples, and travel sites such as Orbitz, are increasingly using sophisticated analytics to price the same product or service differently depending who you are and where you live.

Except for advertised prices, people living in more expensive neighborhoods will pay higher prices for the same products unless the presence of cheaper competitors makes chains change their offers. While such discrimination can be frustrating for customers, it allows retailers to compensate for lost revenue when they need to liquidate stock and/or compete in certain locations, allowing them to stay in business. Some brick-and-mortar retailers with online shopping sites use price by location to be able to compete locally. For instance, one might see higher prices at a Staples in Harvard Square in Cambridge, Mass., than the same retailer in Somerville, just three miles away.

Tests conducted by journalists from Wall Street Journal demonstrated that Staples.com priced a basic Swingline stapler depending on the zip code of the customer. There were differences up to 10.5 percent. Users in price-sensitive areas and others where Staples has more direct competitors received lower prices.

A study from the Universitat Politecnica de Catalunya and Telefonica detected several methods used by retailers to differentiate potential customers and set different prices, such as combination of browser/OS, type of technology (tablet or smartphone) used to make a purchase, location, and personal information.

Search discrimination is another way to get more revenue from potential buyers. Search engines, knowing the user's history, display more expensive choices to users looking for a specific category instead of a single product. Two users looking for hotels in the same city, for the same dates, can get different choices depending on their location and search history. Booking sites make money on commissions paid by hotels, airlines, and other travel services and it is in their interest to get people to choose the most expensive choices.

Of course, there are two sides of the story. Those price differences can help some people get the service they want. The fact that some airline passengers pay a higher price for the same seats means that other people can afford traveling by plane.

Should CIOs help make price discrimination a reality? It depends on your potential market. I think it would be easier from a technical point of view, and less likely to create an angry customer, to offer special discount coupons to online shoppers instead of displaying different prices. Also, it is very important to keep existing customers happy by offering them the best deals.

As price discrimination grows, and price comparison becomes easier, discriminated customers may choose to go elsewhere. Still, used sparingly and with the right product mix, it could become another excellent tool to provide your CMO. If nothing else, to apply the tool, you need to know your customer and their habits better than you might know them now.

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SaneIT   Price Discrimination in Online Shopping   5/2/2013 7:42:00 AM
Price discrimination
That makes me wonder if you can't game the system a bit using a proxy service that can be used to hide your location or at least shift it until you get to check out.  While I can understand why companies would try this I can only imagine that the response when it becomes common knowledge.  People are going to feel ripped off and will get bitter.  This sounds like a case of making as much as you can now and throwing away the future.
Pablo Valerio   Price Discrimination in Online Shopping   5/2/2013 8:11:12 AM
Re: Price discrimination
"That makes me wonder if you can't game the system a bit using a proxy service that can be used to hide your location or at least shift it until you get to check out"

@SaneIT, that's what the research team from Barcelona did to obtain different results.

If I want to buy something expensive I would start with a clean browser (deleting all cookies and history) and check the price with a friend somewhere else.

I think retailers have other possibilities. As I mention in my article, giving discount coupons based on location, and the url where they arrived from, can personalize offers without having different prices online.

Just two weeks ago I ordered a pair of prescription sunglasses. I went through the process until the shopping cart, and then I stopped to have dinner. An hour later I received an additional 20% percent discount in my mailbox to finish the purchase.
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Zaius   Price Discrimination in Online Shopping   5/2/2013 9:31:21 PM
Re: Price discrimination
You are lucky that you stopped for dinner and got that 20% off. Most probably, they were afraid that you are considering other competitors' sites. They actually played a clever trick to bring you back. I like it! And, you also won a discount! A win-win situation -I can say.
tjgkg   Price Discrimination in Online Shopping   5/2/2013 10:09:32 PM
Re: Price discrimination
Land's End did the same thing with me recently. Some etailers are very aggressive. But price discrimination has been around for a while. Just look at the airlines. Nobody on a flight has paid the same price.
SaneIT   Price Discrimination in Online Shopping   5/3/2013 8:20:45 AM
Re: Price discrimination
So you're saying use incognito mode?  I think I'm going to try this a few times to see if I get different results.  I can see this turning into a business model for some web based company, finding the settings that get you the best price online then acting as a middle man for the purchase.
Pedro Gonzales   Price Discrimination in Online Shopping   5/3/2013 11:59:05 AM
price discrimination a useful tool
I guess I was the only one that didn't know price discrimination was something common. I will try to be more careful when purchasing items online.  For a online business, using this approach will be very beneficial. Also, I do agree that they should offer special coupons for loyal customers.  I don't think many people will take their time to find out whether a company is using this technique, they just want to purchase their product. 

 

 
Kerstin Carson   Price Discrimination in Online Shopping   5/4/2013 5:28:39 AM
Re: Price Discrimination
This article's title peaked my interest because it immediately made me think of the days when my parents would complain about the price of produce – in chain grocery stores, not little mom-and-pops businesses – being more expensive in lower-income neighborhoods compared to higher-income areas; and their gripe on the issue was not their alone.

So reading about how price discrimination is playing itself out among e-businesses reminded me of Robin Hood's mantra: robbing from the rich and giving to the poor. At the same time, I don't think that's where these online retailers are coming from, especially when a business' end goal is to make as much of a profit as possible.

A tech-savvy customer – regardless of their economic background – will know how to find the best deals online by using a trick like SaneIT mentioned; and those who aren't so tech-savvy will, as Pablo mentioned in his article, simply spend their money elsewhere.  Businesses must be a few steps ahead of the game, right? Is offering discounts and the best deals all they've come up with so far? They've got to have something up their sleeve, right?
glenbren   Price Discrimination in Online Shopping   5/6/2013 12:41:36 AM
Re: Price discrimination
There are tons of coupon sites that list coupon codes for most online retailers that use them, and retailers often offer special deals to newsletter subscribers. I never purchase anything online without comparing prices, reading reviews, and searching for coupon codes. If I see a box to apply a coupon code during checkout, and I can't find a coupon code, I might reconsider the purchase. My thinking is that if they've offered a coupon to someone, there should be no reason I can't get it too. I wasn't aware that they use location information to determine prices. I don't like using a proxy, but I may try that as well.
SaneIT   Price Discrimination in Online Shopping   5/6/2013 7:16:19 AM
Re: Price discrimination
Coupon sites are an interesting niche to me, but what I've seen is that there are far more bad coupon sites out there than useful sites.  Even sites with discount codes tend to be expired codes or what looks like random guessing or "it should work" codes. 
MDMConsult   Price Discrimination in Online Shopping   5/6/2013 8:23:31 AM
Re: Price discrimination
@SaneIT Yes,  If overcoming mobile coupon challenges can be successful the industry should also see more volume in its usage. I noticed a challenge for the consumer when retailers such as the stores or restaurants are offering mobile coupons with coupon codes to redeem. This is great except for the fact that some of these coupons still require for you to print them out and redeem in person. This area needs improvement in how to save more time.
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