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Paris, Thursday, September 28, 2000 Web Asks, How Much Can You Pay? Retailers' Experiments With Variable Pricing Ignite Consumer Wrath
By David Streitfeld Washington Post Service
WASHINGTON - Few things stir up a consumer revolt quicker than the notion that someone else is getting a better deal. That is a lesson that Amazon.com has just learned. Amazon, the largest and most potent force in e-commerce, was recently revealed to be selling the same DVD movies for different prices to different customers. It was the first major Web test of a strategy called ''dynamic pricing,'' which gauges a shopper's desire, measures his or her means and then charges accordingly.
The Internet was supposed to empower consumers, letting them compare deals with the click of a mouse. But it is also supplying retailers with information about their customers that they never had before, along with the technology to use all this accumulated data.
While prices have always varied by geography, local competition and whim, retailers were never able to target individuals effectively until the Web.
''Dynamic pricing is the new reality, and it's going to be used by more and more retailers,'' said Vernon Keenan, a San Francisco Internet consultant. ''In the future, what you pay will be determined by where you live and who you are. It's unfair, but that doesn't mean it's not going to happen.''
With its detailed records on the buying habits of 23 million consumers, Amazon is perfectly situated to employ dynamic pricing on a massive scale. But its trial ran into a snag early this month when the regulars discussing DVDs at the Web site www.DVDTalk.com noticed something odd.
One man recounted how he ordered the DVD of Julie Taymor's ''Titus,'' paying $24.49. The next week he went back to Amazon and saw that the price had jumped to $26.24. As an experiment, he stripped his computer of the electronic tags that identified him to Amazon as a regular customer. Then the price fell to $22.74
''Amazon was trying to figure out how much their loyal customers would pay,'' said Barrett Ladd, a retail analyst with Gomez Advisors. ''And the customers found out.''
A number of DVD Talk visitors were particularly distressed to find that prices seemed to be higher for regular customers. ''They must figure that with repeat Amazon customers they have 'won' them over and they can charge them slightly higher prices since they are loyal and 'don't mind and/or don't notice' that they are being charged 3 to 5 percent more for some items,'' wrote a user whose online handle is Deep Sleep.
Amazon says the pricing variations, which it stopped as soon as the complaints began coming in from DVD Talk members, were completely random.
''It was done to determine consumer responses to different discount levels,'' said a spokesman, Bill Curry. ''This was a pure and simple price test. This was not dynamic pricing. We don't do that and have no plans ever to do that.''
But an Amazon customer service representative called it exactly that in e-mail to a DVD Talk member.
''I would first like to send along my most sincere apology for any confusion or frustration caused by our dynamic price test,'' the Amazon representative, Galen Sather, wrote. ''Dynamic testing of a customer base is a common practice among both brick & mortar and Internet companies.''
Indeed, physical stores have always had varied pricing. Prices might be higher in an affluent neighborhood or lower, depending on the goods being sold. A stereo system or camera purchased in certain neighborhoods of Manhattan would almost always be cheaper than in a small town with only one electronics store. Industries as basic as airlines and automobiles routinely adjust their prices because of the consumer's negotiating skills and general savvy.
Still, these traditional methods used to calculate prices are sledgehammers compared with the Internet's scalpel. For one thing, the Web provides a continuous feedback loop: The more the consumer buys from a Web site, the more the site knows about him or her, and the weaker the customer's bargaining position is. It is as if the corner drugstore could see you coming down the sidewalk, clutching your fevered brow, and then doubled the price of aspirin.
''Any retailer would love to do dynamic pricing if they could,'' Mr. Ladd said. ''If you could make the optimum amount of money from a consumer who's willing to pay more, that's a beautiful thing.''
Last autumn, in a real-world example of dynamic pricing, Coca-Cola Co. was reported to be testing a vending machine that increased prices for soft drinks when the weather was hot. The company's chairman, Douglas Ivester, noted that people who were watching, say, a sports championship in summer heat would naturally develop a powerful craving for a drink. ''So it's fair that it should be more expensive,'' he was quoted as telling a Brazilian magazine. ''The machine will simply make this process automatic.''
The reaction was swift and brutal, causing Coke promptly to deny that it would ever have a vending machine do any such thing.
''Amazon knows who has the ability and perhaps the incentive to pay more based on demographics, on purchasing history, on income and urgency,'' said Mike May, an analyst for Jupiter Communications Inc. ''The variable that they're deficient on is which customers won't mind paying more. They don't know the level of outrage.''
At DVD Talk, that turned out to be considerable. The DVD buffs could not figure out exactly what Amazon was doing, but they knew they did not like it.
''This is a very strange business model, to charge customers more when they buy more or come back to the site more,'' said one user who goes by the online name Kuroiinu. ''I have no problem with coupons for first-time customers as marketing enticements, but I thought the idea was to attract customers first and then work hard to keep them. This is definitely not going to earn customer loyalty.''
Others were blunter. ''I will never buy another thing from those guys!!!'' wrote Patrckpiteo.
Mr. Curry, the Amazon spokesman, stressed that the price test lasted ''only a few days'' over the Labor Day holiday weekend in early September.
While electronic-commerce experts said they did not know of any other examples where consumers were being subjected to dynamic pricing, they agreed that it was only a matter of time.