Grocery store prices are changing faster than ever before — literally. This month, Walmart became the latest retailer to announce it’s replacing the price stickers in its aisles with electronic shelf labels. The new labels allow employees to change prices as often as every ten seconds.
“If it’s hot outside, we can raise the price of water and ice cream. If there's something that’s close to the expiration date, we can lower the price — that’s the good news,” said Phil Lempert, a grocery industry analyst.
Apps like Uber already use surge pricing, in which higher demand leads to higher prices in real time. Companies across industries have caused controversy with talk of implementing surge pricing, with fast-food restaurant Wendy’s making headlines most recently. Electronic shelf labels allow the same strategy to be applied at grocery stores, but are not the only reason why retailers may make the switch.
Electronic shelf labels allow firms to change prices frequently (and was something I predicted back in 2017). This also allows them to tailor prices to current demand conditions (setting prices higher when demand is higher, and setting prices lower when demand is lower) as the article notes (referring to 'dynamic pricing'). However, electronic shelf labels could also allow firms to engage in personalised pricing (or first-degree price discrimination). This involves setting a different price for every consumer, as I described in this post last year.
If the firm could use personalised pricing perfectly, they would set the price for each consumer exactly equal to the maximum that the consumer is willing to pay. This is the holy grail of pricing for firms, because there's no possible way that a firm can be more profitable than when it can sell its products for the maximum that each consumer individually is willing to pay for them.
Now, consumers don't willingly tell firms what they are willing to pay, but as I note in my ECONS101 class, firms do know a whole lot about their customers, including what they have purchased in the past, and what prices they paid, and importantly what they didn't purchase in the past, and what prices they were offered. That allows firms to estimate what their customers are willing to pay for individual products.
Now, consider how electronic shelf labels allow firms to increase their data collection and analytics efforts. The electronic shelf labels are a good way of gathering data, since the prices can be adjusted, and then the response of consumers (in terms of whether they buy, and how much they buy) can be measured. This data can then be mined (perhaps using machine learning) to try and estimate consumers' willingness-to-pay for each product.
Firms can then use that data for pricing, in increasingly sophisticated ways. Remember that, using electronic shelf labels, a firm can adjust prices in real time. Combining electronic shelf labels with facial recognition at the door would allow a supermarket to adjust prices based on which consumers are in-store at the time. In theory, the next step would involve combining electronic shelf labels with facial recognition and real-time customer tracking in-store (and you may doubt this is real, but a quick search on Google turns up dozens of firms that already offer this type of data analysis). This would allow a supermarket to adjust prices on individual items just before a customer gets to them. And altogether this adds up to something that is getting increasingly close to perfect personalised pricing.
The next step after that is to eliminate the shelf label entirely, and simply have consumers scan a QR code to find the price, or have it automatically appear on their custom app as the customer moves around the store. That way, supermarkets could serve a different price to every consumer without ever having to change a price label in-store. And no customer would know the price that is being offered to any other customer. Perfect!
[HT: Marginal Revolution]
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