The Price of Everything

The relationship between the retailer and the customer can be beset by calculation on both sides. The retailer is trying to extract enough data about the customer to calculate the next best action, while the customer is trying to extract the best deal.

There is nothing new about customers comparing products and prices between neighbouring shops, and merchants selling similar goods can often be found in close proximity in order to attract more customers. (This is especially true for specialist and occasional purchases: in large cities, whole streets or districts may be associated with specific types of shop. London has Denmark Street for musical instruments, Hatton Garden for jewellery, Saville Row for made-to-measure suits, and so on.)

And as Tim Harford points out, exploitative algorithms are using tricks as old as haggling at the bazaar.

But nowadays the villain, apparently, is eCommerce. As a significant share of the retail business migrates from the high street to the Internet, many retailers are concerned about so-called showrooming. It may seem unfair that a customer can spend loads of time in the high street, wasting the time of the shop assistants and shop-soiling the goods, before purchasing the same goods online at a better price. To add insult to injury, some people not only practice showrooming, but then blog about how guilty it makes them feel.

There is a common belief that the Internet can generally undercut the High Street, and there are several reasons why this belief seems to make sense.

• Internet businesses compete on price rather than service, so the prices must be good.
• An internet store can provide economies of scale - serving the whole country or region from a single warehouse, instead of needing an outlet in each town.
• An internet store can offer a much larger range of goods without increasing the cost of inventory - the so-called Long Tail phenomenon
• An internet store typically has lower overheads - cheaper premises and fewer staff
• An internet business may be run as a start-up, with less dead wood. So it is more agile and less bureaucratic. 

But there are some questionable assumptions here, as well as some counterbalancing concerns.

• The economic and logistical costs of delivery and return can be significant, especially for low-ticket items. With clothing in particular, customers may order the same item in three different sizes, and then return the ones that don't fit.
• Investors previously poured money into internet businesses, and the early strategic focus was on growth rather than profit. As internet business become more mature, investors will be looking to see some decent returns on their investment, and margins will be pushed up.
• And then there is differential pricing ...

One of the key differences between traditional stores and online stores is in pricing. Although high street retailers often drop prices to clear stock - for example, supermarkets have elaborate relabelling systems to mark-down groceries before their sell-by date - they do not yet have sophisticated mechanisms for dynamic pricing. Whereas an online retailer can change the prices as often as it wishes, and therefore charge you whatever it thinks you will pay. According to Jerry Useem,

The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be.

I heard Ariel Ezrachi talking about this phenomenon at the PowerSwitch conference in Cambridge a few weeks ago. (I have not yet read his new book.)

There is an assumption is that the internet is a blessing when it comes to competition. Endless choice. Ability to reduce costs to close to zero. etc ... What you see online has very little to do with the ideas we have of market power, market dynamics, etc. everything is artificial. It looks like a regular market, with apples or fish. But because it’s all monitored, it’s not like that at all. What you see online is not a reflection of the market. You see the Truman Show — a reality designed just for you, a controlled ecosystem. (via Laura James's liveblog)

In his play Lady Windermere's Fan, Wilde offered the following contrast between the cynic and the sentimentalist.

Lord Darlington: What cynics you fellows are!
Cecil Graham: What is a cynic?
Lord Darlington: A man who knows the price of everything and the value of nothing.
Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.

According to one of the participants at the PowerSwitch conference, some eCommerce sites quote higher prices for Apple users, based on the idea that they are less price-sensitive and can afford to pay more. In other words, the cynical Internet regards Apple users as sentimentalists.

If there is an alternative to this calculative thinking, it comes down to reestablishing trust. Perhaps then retailers and consumers alike can avoid an artificial choice between cynicism and sentimentalism.

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Update (2020) added a link to a new paper by Frederik Borgesius, which looks at some of the legal as well as ethical implications of differential pricing.

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Emma Brockes, I found something I like in a store. Is it wrong to buy it online for less? (Guardian, 3 May 2017)

Frederik Zuiderveen Borgesius, Price Discrimination, Algorithmic Decision-making, and European Non-discrimination Law (European Business Law Review, 2019/20)

Ariel Ezrachi and Maurice Stucke, Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy (Harvard University Press, 2016) - more links via publisher's page

Tim Harford, Exploitative algorithms are using tricks as old as haggling at the bazaar (Financial Times, 5 October 2018)

Laura James, Power Switch - Conference Report (31 March 2017). Further links including video via Power Switch Conference (March 2017)

Joshua Kopstein, Is Amazon Price-Gouging You? (Vocativ, 4 May 2017) via @charlesarthur

Jerry Useem, How Online Shopping Makes Suckers of Us All (Atlantic, May 2017)

Price-bots can collude against consumers (Economist, 6 May 2017)

The Dilemma of Showrooming, (Daniels Fund Ethics Initiative, University of New Mexico)

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Related posts: Online pricing practices to be regulated? (October 2009), Predictive Showrooming (December 2012), Showrooming and Multi-Sided Markets (December 2012), Showrooming in the Knowledge Economy (December 2012), The Price of Fish (January 2013), Power Switch Conference (March 2017), The Idea of Showrooming (July 2017), Shoshana Zuboff on Surveillance Capitalism (February 2019)


Updated 11 July 2020

Business Network Optimization

Some @ATKearney consultants have written an interesting article on Business Network Optimization

"Anyone thinking about rationalizing a network would naturally ask whether so many nodes are really necessary. Networks are a great deal more complicated than that, and managing them requires expansive strategic imagination."

A simplistic accountancy view of a network looks at the direct contribution of each node. From this viewpoint, some nodes may not produce enough direct value to justify their continued existence, and there will be calls for these nodes to be closed or merged with their neighbours.

For example, there are several proposals currently under consideration within the UK National Health Service to rationalize Accident and Emergency provision by closing some hospital departments and relocating staff. These proposals are based on arguments about the optimal size of an Accident and Emergency unit, and on claims that smaller units are unlikely to deliver value for money or clinical  excellence.

Opponents of these closures point to the indirect effect of these closures, including the likely consequences on non-emergency healthcare services at those hospitals that will lack accident and emergency provision, as well as the wider social impact on the local community.

The example given in the A.T. Kearney article is the French postal service, and the authors assert the indirect value of the village post office, using an almost untranslatable French term l'animation du territoire, the "animation of the territory".

The Kearney article identifies three types of business network, which it calls Production, Service and Distribution, and eight elements of network management which must be optimized together. It calls these KNOTs, which stands for Kearney Network Optimization Tools, and asks us not to think of them as merely a laundry list of best practices used to build an optimal network. 



The article illustrates the concept of indirect value in terms of the cross-over between physical and online retailing. If a customer views a product in a physical store and then orders it online, the physical store is providing some indirect value to the retail operation as a whole. It is therefore makes sense to optimize the entire online/offline network as a whole, rather than regarding them as two separate networks. See my post on Showrooming and Multi-sided Markets (December 2012).

Business Value from SOA - Silo Busting

One of a series of posts exploring the business value from SOA.

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A common complaint about legacy IT is that it is organized into silos. This doesn't just affect legacy systems, but it may also affect new projects.

In his classic book on the evolution of buildings (How Buildings Learn), Stewart Brand showed how the townscape often lasted longer than the buildings themselves. In an already built-up area, new buildings typically occupied the same footprint as the old building it replaced. The same is often true of new IT systems - the functionality may extend into previously unoccupied areas, but it is more difficult to make radical changes to the boundaries between systems. I have a lot about this in my 2001 book on the Component-Based Business.

But if the sponsorship and funding for new IT projects emerges from a host organization, and if the host organization is itself organized into functional silos, then it is hardly surprising when this structure is reflected in IT. This is an example of Conway's Law.

So we have long argued that new modes of IT sponsorship and funding need to be developed if an organization wishes to get maximum benefit from SOA. But what about the effects on the host organization itself?

There is now a strong pressure within the business world for silo-busting. This is nothing to do with IT, and everything to do with making business operations more effective and joined-up. Ranjay Gulati, a professor at the Harvard Business School, published an article on Silo-Busting last year (Silo Busting: How to Execute on the Promise of Customer Focus, Harvard Business Review, May 2007). He argues that "companies claim to offer customer solutions, but most aren’t set up to deliver them without specific changes in organizational structure, incentives, and relationships". I'm looking forward to reading his forthcoming book on the same subject.

A quick search for Silo Busting finds the idea applied to several areas of management.

• Healthcare ("health care organizations suffer from internal functional barriers that get in the way of achieving the level of success that they want and need"): Leta Beam (April 2006 pdf), R. Wade Schuette (September 2006)

• Marketing: Roy Young (April 2008)

• Retail: Eric Olafson (September 2007)

• Supply Chain: Robert Bowman (September 2008)

I also found some material from an improvisational comedy group, which trains managers to develop a silo-busting mentality (August 2003).

So this is a common theme within the business literature, and SOA offers strong support, especially for multi-channel operations.

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Gulati identifies four success factors for silo-busting

• Coordination (Structure and Process - this is the first area where SOA and BPM can help)
• Cooperation (Sharing - this is where Web 2.0 or Enterprise 2.0 can help)
• Capability Development (this is perhaps where improvisational comedy comes in)
• Connection with Customers (there is a secondary role for SOA in providing joined-up customer-facing services)

But how much is this worth?

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Conway's Law doesn't work in reverse. You can't just build joined-up systems and hope that the desired organizational change will follow automatically. There is always going to be a larger organizational change programme, with a significant but not exclusive role for SOA (and related activities, especially Service-Oriented Business Modelling). So it is hard to quantify exactly how much business value is created by the SOA piece. But we may be able to get some clues from the organizational change projects people are already doing ...