Economics 101 tells us that price is the point at which supply matches demand, a simple but infinitely variable graph. Throughout history, that equation has reflected the reality of a face to face negotiation, apart from the recent glitch created in the name of efficiency by mass retailing which fixes prices. We all know somewhere in our psyche that price is what someone is prepared to pay at a given point in time for an item.
Look at any housing auction in Sydney at the moment, all sorts of factors are at play that make an auction the best way to determine the ‘right price’ at which to strike a deal. The notion of a fixed price is almost dead in the face of this level of uncertainty about what people are prepared to pay. Uber has disrupted the taxi industry with the same idea. Couple of weeks ago, caught in the rain in mid-afternoon, Taxi’s were an extinct species, so I called up Uber, and needed a second mortgage to pay the Uber-Price, driven up by the time of day, and immediate demand generated by the fact that it was raining cats and dogs.
Price is far more than just simple intersection on an economists graph.
Chain retailers have semi fixed prices. They have a shelf price, and a set of promotional and deal prices as wide as the imagination and pocket depth of their suppliers who fund the discounts. However, while they are variable, over the shorter time frames they are fixed at some level. This process of centralised control and a physical selling face enables the efficiency of mass merchandising to be leveraged, but loses the flexibility of being able to respond to individual demand at a particular moment in time. .
Imagine the chaos if each store manager could set his/her own prices, then negotiate at the checkout!
Category management evolved as a means to maximise the revenues and margins from a fixed retail space. It is a numbers driven game of great sophistication requiring deep pockets, analytical resources and scale to play effectively. It nevertheless relies on fixed prices, varied over a week or so, and across varieties, brands and shelf placement, but nevertheless, fixed.
On line retailers by contrast are able to vary prices not just day to day, but minute to minute, and increasingly person to person. It is the digital equivalent to haggling, each party setting out to maximise the return they get from the transaction, by using the whole gamut of trading and negotiation tools.
Amazon is the master, their algorithmically driven pricing is hugely sensitive to hundreds, probably thousands of factors from the weather to your browsing and purchase history, and the time of day.
How would a bricks and mortar retailer combine the margin maximisation flexibility of algorithm driven pricing with the physical constraints of a retail space?
It is a logical question, one that has prompted a lot of thought by a lot of smart people, and mostly the answer is that you can’t.
However, do not tell Amazon who are always prepared, indeed, live by disruption. Their experiment in Seattle with Amazon Go may not succeed in the short term, but the logic of managing price by algorithm to maximise returns will not go away, and Amazon is a long view retailer, unencumbered by demanding quarterly driven stock markets. I do not think this will be the end of the Australian retail duopoly any time soon, there is still plenty of areas for them to continue to squeeze the lemon to make profits, but it is certainly a portent of things to come.