Article: How Online Shopping Makes Suckers of Us All

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May 15, 2017
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Article, Behavioral Finance, Research, Budgeting, Purchase Decisions, Current Events, Ethics

Rather long (about 15 minute read) but intriguing article from The Atlantic that provides great context for trends that I have blogged about the growth of online shopping (here and here). The article describes how in this era of “big data” retailers are harnessing consumer information to price discriminate and obliterate the concept of a fixed price.

Here are a few excerpts:

  • Death of fixed price: “This could be seen as the final stage of decay of the old one-price system. What’s replacing it is something that most closely resembles high-frequency trading on Wall Street. Prices are never “set” to begin with in this new world. They can fluctuate hour to hour and even minute to minute—a phenomenon familiar to anyone who has put something in his Amazon cart and been alerted to price changes while it sat there. A website called camelcamelcamel.com even tracks Amazon prices for specific products and alerts consumers when a price drops below a preset threshold. The price history for any given item—Classic Twister, for example—looks almost exactly like a stock chart.”
  • At what point do online sales lead to crushing retail bankruptcies? “On a whiteboard, he drew a series of lines representing the rising share of online sales for various kinds of products (books, DVDs, electronics) over time, then marked the years that major brick-and-mortar players (Borders, Blockbuster, Circuit City and RadioShack) went bankrupt. At first the years looked random. But the bankruptcies all clustered within a band where online sales hit between 20 and 25 percent. “In this range, there’s a crushing point,” Hariharan said, clapping his hands together for emphasis. “There’s a bloodbath happening.”
  • Retailers understand where consumers are comparison shopping and where they are not: “Amazon long ago mastered this tactic, Hariharan says. In one instance, Boomerang monitored the pricing shifts of a popular Samsung television on Amazon over the six-month period before Black Friday. Then, on Black Friday itself, Amazon dropped the TV’s price from $350 all the way to $250, undercutting competitors by a country mile. Boomerang’s bots also noticed that in October, Amazon had hiked the price of some HDMI cables needed to connect the TV by about 60 percent, likely armed with the knowledge, Hariharan says, that online consumers do not comparison shop as zealously for cheaper items as they do for expensive ones.”
  • Will more companies follow the lead of start-up Everlane and provide full transparency?The apparel start-up Everlane, for instance, is betting that it can capitalize on consumer backlash to retailers’ ever more vaguely underhanded tactics. The company spells out the cost of making each of its products and the profit it earns on each. Recently it informed customers that the cost of cashmere from Inner Mongolia had dropped. It was dropping the price of its cashmere sweaters by $25, because they now cost less to make. “Radical transparency,” Everlane founder and CEO Michael Preysman calls the approach.”

The question for your students is a simple one: How can you game this system when online retailers have so much information to understand you and your buying habits?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.