James Zigrino
Amazon is the granddaddy of all e-commerce sites - when the big A does something, everyone takes notice. It's probably The Future.
So we noted with interest that what seemed to be throwaway comments recently made by the economist Professor R Preston McAffee. McAfee made headlines just a few months ago, with a report on how the US Government wasted half a billion - yes, billion - dollars, simply by not shopping round for the best deal on its computer hardware.
That's a lot of cash, and McAffee clearly knows his stuff, yet he's quite blasé about not quite getting Amazon's strategy: "I'm not exactly sure what they're doing," he stated.
So what are they doing? Well, essentially they are showing random variations on the prices of items - on the face of it, not that unusual. We're used to airlines varying prices over time, a process called "yield management", that matches price to current supply and demand, ensuring flights are filled at the highest possible fares for the market.
But what this usually means is that customers all see the same price at any given time. What McAffee claims Amazon does is the exact opposite. Different people see different prices even if they look at the same time. Though the prices overall fluctuate randomly, Amazon uses cookies to ensure that for the individual shopper, the price stays stable at the first price they saw for each item.
So what's going on? Well, unsurprisingly, Amazon are keeping quiet, but it looks a little like a kind of reverse haggling - they randomly vary prices, to find what is the highest price customers are prepared to pay before sales fall enough to cut into the extra income from that higher price. In other words, they are dynamically altering prices to maximise income, rather than sales.
Where have we seen that exact algorithm before? Well, for a start that's precisely how our Pay-Per-Click bid management software works, varying bids until maximum Return-On-Investment (ROI) is established.
Google also uses a similar algorithm in its SERP's - it sometimes varies the search results seen by different "guinea pig" users, finally sticking with the result sets which get the best click-through rate from its test group.
What we may be seeing is an emerging new way of managing prices suitable for all e-commerce markets, and perhaps an end to the idea of a uniform price for goods from a seller. After all, this is only a subtle extension of how eBay operates; already the biggest sales market of all.
This may, in turn, lead to a mutation of price comparison sites and search engines, as they migrate from the idea of comparing those uniform prices.
A few years from now, watching book prices fluctuate while you wait for the perfect moment to pick up a Stephen King hardback and the latest Harry Potter (for the kids...of course) will seem as normal as doing exactly the same for stocks and shares seems now. Ultimately, it's exactly the same technology and the same rules of supply and demand which govern them both.
