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Road to Nowhere – The Race to the Bottom

By Feather Hickox

Eyeing that new camera? Try this trick. Put the camera in your shopping cart, take it out, and come back to the site a few days later. Did the price come down? Did you receive email offers for a discounted camera during the week? If so, you have been price optimized.

Merchants are in an epic price battle for your wallet share. And they are using analytics to power their dynamic pricing strategy -- scrutinizing every consumer click, reacting to every signal, and in some cases, doing whatever it takes to win your business. And it is exhausting and unsustainable.

Some pundits believe it isn’t sustainable because it can tarnish a brand. That is true if you are the person that bought Dance Central 3 for US $49.96, not US $15. Once you find out that you overpaid, I’m certain you won’t be too happy with your merchant.

We think there is another good reason it is not sustainable. When merchants are only differentiating on price, their margins get squeezed, and it becomes more difficult to make a profit. We call it the race to the bottom. And without powerful decision management tools and a focus on customer experience … merchants can only lose.

Merchants need a price optimization strategy, albeit a more complex one. Merchants also can’t go about their strategy in the same way that industries like sports and travel do. In these businesses -- with a finite product (limited seats), an expiration date, and often a captive audience  -- the implementation of a dynamic pricing strategy can be different. Sports teams are competing with Stub Hub (ticket prices need to be demand-oriented or they are leaving money on the table). Airlines are balancing prices with convenience and service, and their consumers are willing to make the tradeoffs.  

But merchants -- unless you are a big box retailer -- cannot simply differentiate on price and price alone as a distinguishing competitive advantage. While some customers always go for the lowest price, others are motivated by quality, service and convenience, which are drivers of loyalty. And when a customer is unhappy, they have plenty of public places to vent their displeasure with a merchant. Your price optimization strategy needs to consider the overall customer experience. By doing so, you will create a brand experience that your competitors cannot easily replicate.

Here is the good news: many merchants are putting customer experience first.  Earlier this month, we released the results of an independent survey we commissioned. It found that a major shift is underway in how businesses (including merchants) interact with their customers. The survey found that, by 2015, 84 percent of respondents plan to use data analysis to inform at least half of their customer decisions, and over half plan to target messages to individual consumers.

However, we are still early days. Strikingly, more than half of those surveyed take at least three months to change their operational procedures and systems to incorporate new insights about customers gained from analysis. At the same time, only 20 percent are able to target a message to an individual consumer today. As a result, businesses are prioritizing decision automation technology in 2013 to enable them to react faster to customer life-changes (such as a marriage, a new job, or the birth of a child), increase profitability, make better decisions, and increase customer relevance.

So, here is the million dollar question: will 2013 be a race to the bottom, or can merchants combine price optimization strategies with an unbeatable overall customer experience that helps them rise to the top?

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