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While prices of products are traditionally set long before they hit the shelves, retailers now have the chance to boost their margins by changing prices on the fly for each shopper.
A new study from researchers at the University of Arkansas found that retailers can increase profits by altering prices on certain products based on real-time knowledge of customers' intentions to purchase — or not purchase — other products.
Cary Deck, one of the study's authors, said online businesses can glean a lot of information from a customer's online shopping cart, even if they never buy any of the items in it.
"It tells the store something about the shopper's taste and what other items may be of interest to the user," Deck said. "Stores can then set prices on those items accordingly, based on anticipated demand."
The method the researcher studied is referred to as sequential pricing and occurs when a seller, aided by technology, is able to set the price for a subsequent product based on a customer's interest in or preference for an initial product. For example, a seller identifies a shirt a customer is interested in, regardless of purchase, and then sets or alters the price — in real time — for pants that go with it.
The researchers say that because product selection reveals information about the buyer's tastes, retailers are better able to estimate a shopper's willingness to purchase other items and tailor prices accordingly.
As part of the study, researchers developed a model in which a seller sets prices for two items. The model allowed for the possibility of revising the price for the second item based upon the consumer's revealed preference for the first item.
The study found that that a sequential pricing strategy worked better than bundling products and "pure" component pricing, in which a retailer simultaneously sets a price for items that are close substitutes.
The strategy isn't just limited to online retailers. The researchers said that new technologies, such as radio-frequency identification (RFID), allow brick-and-mortar retailers to monitor customer preferences in real time.
By placing RFID tags on each item, the researchers said businesses would be able to know which products shoppers are taking off the shelf or rack and thus are interested in. Retailers could then use that information to individualize prices while the customer is shopping.
The study, co-authored by Amy Farmer and John Aloysius, was published in a recent issue of the journal Information Systems Research.