Online price tracking tools enable rapid price response
Back in November 2000, Professor Robert J. Kauffman posed a question in a paper* that suggested that the Internet would lower on-line prices as a result on intense competition between vendors. His research presented a case where intense competition between vendors happens. However it doesn’t drive price down in a never-ending spiral. Instead his evidence points to the fact that actually early online price tracking tools allowed rapid reaction between competitors.
Matching prices go up as well as down
This early work found that firms who use these tools avoided intense price competition predicted by the then prevailing theory. With the assistance of these price-tracking technologies, companies found their price equilibrium. These tools allow companies to understand each other’s price points and reacting quickly to the changes.
The evidence from the study shows that firms tend to match competitor price changes and prices tend to go up and down (as opposed to just down). Also of interest in the study was the fact that companies included in the study do not always follow a competitors prices changes when an item in expensive.
The study also found that if market leaders constantly review, match or beat prices with their competitors, the various price-tracking technologies that are available will tend to minimise the benefits (e.g., larger increased market share) of leader’s price promotions.
Online Price tracking is an essential tool
Sixteen years later and price tracking and matching technologies are now one of the essential tools needed in today’s hyper-competitive business. For retail managers these technologies enable them to understand product pricing dynamics and trends easily.
As always, investing in these solutions is a difficult choice for retailers. It’s a trade-off between short -term outlay and long-term competitive sustainability. Ultimately the capacity to react quickly with automation may mean the difference between staying in business or not.
Is Dynamic Pricing the next step?
For those retailers with price tracking and matching technologies, price awareness and ability to react is now the norm. However price matching has started to evolve into Dynamic Pricing. Information from price tracking technologies has enabled managers to be become more sophisticated in the way they price and implement pricing strategies.
It’s not for all
Dynamic pricing is not new, but it does depend on certain characteristics. The airline industry was the first to adopt the strategy and it can be clearly seen in various industries including the hotel industry and other service industries.
The main characteristic is that the product is perishable or expires at a certain point (e.g. flight availability, date expiry). The second characteristic is capacity. Meaning that there is a fixed capacity (number of seats, rooms, etc.).
In some environments dynamic pricing may not be right. Customers may not react well to continual dynamic pricing. However retail is evolving and large marketplaces such as Amazon are driving consumer acceptance of dynamic pricing.
Nevertheless retailers cannot implement dynamic pricing without understanding their competitive environments and customer profiles. By starting the journey with price tracking tools gives retailers a fighting chance to understand their prices with respect to their competition and the growing importance of marketplaces such as Amazon.
Maybe then the next step is dynamic pricing.