Prix fixe? Not on the Net
Fixed prices, which have been the mainstay of consumer purchasing for at least 100 years, have been giving way online to all manners of dynamic pricing schemes. Auctions, reverse auctions, group buying, even bartering are all options available to consumers who want to have more control over how much they pay.
"The Internet enables what were previously isolated consumers to either band together or have much better information than they ever had before," said Dan Schulman, president and COO of Priceline.com, whose company lets consumers name the price they're willing to pay for things like airline tickets. "What you're seeing is the pricing system being turned upside down, with more and more power being transferred to the consumers."
To be sure, many of the pricing schemes that are popular online today aren't exactly new. For decades, farmers have banded together to get volume discounts on tractors, for instance. Auctions have been around for centuries, and negotiating remains a mainstay of economies around the world. In many cases, the Internet simply makes using these models more efficient and opens them to broader groups of people.
But new technologies such as intelligent agents and new Internet standards could truly revolutionise pricing, said Erik Brynjolfsson, co-director of the Center for eBusiness@MIT. Eventually, he said, you'll simply tell your agent what you want to buy, give it a few parameters, and it will go off and do your shopping for you. For instance, if you're looking for a new couch, you might tell it what colour you want, how much you want to spend and how big your living room is. The agent may already know your taste in styles and fabrics, based on previous purchases and demographics data. And it will be able to haggle electronically with a furniture store until it gets a price within the acceptable range.
"Fixed prices are relatively new -- I'd say mainly in the past 100 years -- and they kind of go hand in hand with mass production and mass marketing," he said. "It's a pretty labour-intensive process in conventional stores to change a price. If you want to change the price of a menu, you need to print a new one. If you print it in the morning you can update prices daily. On the Internet, you can update by the millisecond."
In fact, in a recent study Brynjolfsson conducted, he and his co-author found that prices on the Internet changed more rapidly and at smaller increments than at offline stores. With the advent of flexible pricing schemes, the disparity between online and offline will only grow, he said. "Five years from now, it will be much more common to have flexible pricing on the Internet than we see today," he said. "When push comes to shove, offline just doesn't have the capability to adjust prices that efficiently unless they develop some new technologies."
But will consumers tire of all that fluidity? After all, many people dislike shopping for cars because they don't like having to haggle over the price. And while companies like Priceline are working on methods to let you negotiate the price of your groceries, will consumers want to do that every time they buy a quart of milk? "We're seeing a lot of business models that couldn't exist without the Internet, but the fact that they can exist doesn't make them good models," said Mike May, an analyst at Jupiter Communications. "The models do deliver value, but at the expense of convenience and selection." At the same time, May concedes that some people don't mind giving up convenience and selection. "There is a segment of the market that will sacrifice everything to get a good deal. But not everyone is in that segment."
Technology also might reduce the need to bargain. Through personalisation, sites might allow consumers to set their price preferences once, Priceline's Schulman said, "so the next time you go through you're one click away from your optimum price." For that segment of the market that is willing to spend its time getting the best deal, the new pricing models available online are empowering, said Tom Van Horn, CEO at Mercata, a company that allows consumers to band together to get volume discounts. "We sell products that sell from $5,000 (£3,500) down to $15. When you have an item that costs $20 or $15 dollars, each person that joins the buying group may only drive price down pennies," he said. "You would think people wouldn't get that excited about pennies, but the empowerment is a huge factor. The fact that they are making something happen, even if it's only small change, is very important."
Brynjolfsson said companies like Mercata could eventually so revolutionise the power structure between buyers and sellers that Congress could, one day, pass an "anti-consumer trust pact" to protect sellers from unfair collusion of buyers. Historically, such examples of consumer power rarely occur, he said. "You had some cartels, but it was pretty hard to organise buyers before the Internet," he said. "The Internet allows hundreds or thousands or even millions (of people) to get together and buy."