Toward perfect price discrimination in groceries? (from Graton Gathright)

First, thanks for many years of enjoyment from marginal revolution!

Second, I thought you would find it interesting that Safeway’s new “club” program (called Just for U) apparently uses shoppers’ purchase histories to offer household-specific prices.  From the FAQ (italics added):

Why don’t I automatically get these offers?

Our systems use your purchase history to sort through and organize personal price offers, hundreds of coupons, and all of our weekly Card Specials. But only you can determine if our systems got it right.

That’s why we ask that you select offers by loading them to your Club Card. As you provide feedback based on what you select, our systems will improve their ability to sort through and personalize your offers. This will make the program even more valuable to you over time!

Why don’t you just give me these prices in the store?

If every shopper were exactly like you, we could! But the reality is every Safeway customer is different. This program is personalized just for U!

TC again: And via Justin Wolfers, Orbitz steers Mac users toward pricier hotels.

Comments

Sadly (or not) many consumers will fail to recognize that the good offers they are getting come at the expense of more expensive items at regular price. It is all about framing, as I don't think many consumers would go to a supermaket that advertises ridiculously low prices except for some items where you (and only you, because you are unique), get overcharged.

I don't think they can overcharge above what's displayed for the walk in buyer. They'd run foul of retail fair labeling laws.

They don't raise the prices above list, they just raise all the list prices and give the discounts to cardholders.

Almost every item I buy at Kroger's (our local Safeway equivalent), Jewel or Dominicks (in Chicago) has two prices. The regular LIST price, and the Just For Cardholders! price. Sometimes the "discounts" aka "markup-and-mark-back-downs" are several dollars, so you'd pay a giant premium to NOT use the card.

For a while I didn't get a card, but would plead ignorance at the checkout and the cashier would run a generic card. They seemed to have cracked down on that now - cashiers just refuse. Now, if you make a stink, they will ask the person in line behind you to use theirs; they are usually happy to acquire your "points".

You can also use your phone number. My wife tells me to use her mom's number, and then they share the discounts.

I have decent luck with (local area code) 555-1212. I had one clerk ask how I got such a unique phone number.

Stores can get away with these massive markups on display prices only in markets where they are sure that non-card purchases are cometitively insignificant.

My parents signed up for a Safeway card in 1996. My father uses the card when he buys groceries in California. My brother uses the card when he makes supply runs for his company in Alaska. I use the card when I buy gas in Washington. Somebody else gets the coupons. Everybody wins!

The person who "owns" the safeway card I use has been dead for five years.

It's a weird system.

Sadly most people like yourself are ignorant of these programs. You do not get coupons for products use often. You will get competitors coupons (companies trying to increase future sales) or items you buy infrequently.

You do.

A well managed loyalty-card program will give you discounts on some of your often-purchased products (to bring you back to the store or simply to keep their share of your wallet), plus some products that you used to purchased but have not recently purchased (to accelerate the repurchase), plus they use collaborative filtering to give you coupons of products that you have never purchased, but people like you have.

I do agree that trade deals get passed-through as well, prioritizing manufacturers who pay for the privilege.

This has been going on for years, and even decades, its just that the computer and data storage make it possible to implement end user price discrimination more efficiently.

There are many websites, for example, which monitor which products or services you compare on the site, how long you linger at a particular product and come back to it, whether you leave the site and go to another.....and, lo and behold, the next day you get an email from Dell telling you about a bundle you can purchase including a discount on that product you were looking at (available in the bundle, only). There are even some sites that after you do your comparison, and only when you are prepared to buy, do they reveal the price, which may or may not be discounted, depending on how long you linger, whether you made comparisons, etc. Or, if you want to try something else, try Amazon or other websites and put something in your basket without purchasing it and wait awhile...then take it out....and see what happens later when you go back and look at the product again.

Just remember: all a Safeway card is is a link to a database. It identifies YOU to the database. Your purchase habits (and those of your kids and spouse) are in the database. If you always purchase at full price, or if you purchase with coupons, etc., the database remembers and serves you want is good for the database.

One other psychological aspect:

If you don't know you are getting an award, and it is given to you as a "surprise" "gift or award" when you check out, you are being conditioned to anticipate a reward every time you go to the checkout.

Feel that craving.

Like a dog.

Was that just an explanation or were you complaining about individualized price-discrimination? Can't "want is good for the database" sometimes align with "what is good for the shopper"?

Rahul,

Is Safeway instituting this program for its interests in maximizing profit, or not? Consumer surplus has to be extracted from somewhere, doesn't it?

Answer 1: This was just an explanation.

Answer 2: Under this program, some consumers with a lower reservation price will be purchasing the product they would not otherwise have purchased. Increasing quantity sold and consumer welfare and therefore good for the shopper. P decreases for a set of consumers, Q increases overall.

Answer 3: Some consumers will see the list price go up, or not receive a discount, and will have more of their consumer surplus extracted from them particularly if there is a loyalty program as well, and rivals have similar loyalty programs, and you are an infrequent or unattached shopper. In otherwords, some consumers will have more consumer surplus extracted from them. Same Q, higher P.

Answer 4: All of the above are True

There are some people who figure out the nuances of these programs and exploit them. It takes a lot of time, but can result in dramatic discounts. You also have to be willing to go deep on things that are on sale - 35 cans of french cut green beans, anyone?

Google "extreme couponing"

After a spate of publicity to the practice including at least one reality show, retailers are "moving the cheese" and eliminating some of the more lucrative practices.

Does Safeway ask buyers to fill out a form disclosing income and assets? Or is shopping history more useful information? Will college tuition pricing in a few years require families to turn over their grocery shopping history?

Safeway gathers this data from your credit card history and limits, as linking data to credit cards (income, limits, payments, credit rating) are in the database.

If we are talking about Target (which has its own credit card), then maybe. But if you are not using a proprietary credit card I don't think they can keep more than your name.

This might be a bit different at Safeway, since the origin of the card at at least some divisions (Dominicks, for example) is the check cashing card. Who knows what I agreed to when I got that check cashing card, decades ago.

Z, You might be right, depending on the state, on how much data can be collected via the third party )Visa) credit card. This is from California; note the workaround:

"In Pineda v. Williams-Sonoma Stores (February 10, 2011), the California Supreme Court ruled that a merchant may not ask a customer to provide a ZIP code as part of a credit card transaction. Williams-Sonoma used customer ZIP codes that it collected from customers to obtain their home addresses. It then used those addresses to send catalogs to customers who had never provided their address to the retailer. It was able to obtain these addresses through a process known as reverse appending (reverse searches from databases in order to match their customers’ names and ZIP codes with their previously undisclosed addresses)."

Yes, reverse append is pretty common but note this often ends up with wrong information being appended (or no information). The claimed hit rates from outside vendors are likely exaggerations.

For example, there are at least four people with my identical first and last name in my zip code. I fear how accurate this would be for nationalities with few last names (Kim or Lee, for example).

Safeway doesn't even update the area code in their databases reliably when it changes, and I suspect their zip codes are out of synch as well. We all think these marketers are geniuses but in reality this is a statistical science that works great at the aggregate, but is very error prone if you look at individual cases.

I always assumed the ZIP code was a security feature: i.e. if I mislaid my card and someone stole it, it'd be unlikely that he'd know my ZIP correctly too.

If you are trying to sell something, shopping history is more useful information than demographic information.

Who needs shopping lists when you have FAFSA?

Yeah, when colleges do price discrimination they have access to an amount of information that grocery stores can only dream of.

orbitz has learned class warfare. i expect attack ads to begin appearing on Fox

Apple users won't like being known as suckers.

Eh, I think most Mac users already know that they're suckers. They'd just rather be suckers than appear un-hip.

While we're on the subject of databases,

Everytime I log onto this site today,

I get a message from

Trackingsitemeter.com to log in.

Is this website tracking data from its viewers?

Me too. And yes, it's tracking us, like every other website does. Those ads that appear at the top-right are using tracking cookies. (I was shopping for a hard drive the other day, and I'm getting ads for SSDs on MR today.)

Does that explain why I get all those Obama ads?

Funny, all I ever seem to get are SSD HDs and ads for random books

The worst on this page are the social media links. The one for twitter can lock up a browser for 10+ seconds somehow.

Yes! MR became far slower to load once the Twitter / Reddit / FB links were added.

Just use Jenny's number (867-5309). I've yet to find an area code where it doesn't work, and sometimes the clerk will giggle if you accidentally sing it while typing it in.

This kind of proposal were introduced in Sweden by a retail company (ICA) a few years ago for all their bonus card holders. As a holder I can say that there has been a (slight) improvment over the years of the offers we receive.

What about Progressive's or Priceline's Name Your Price strategies? Are these not also perfect price discrimination? Tell us what you're willing to pay and voila, we have a product for you that is exactly (or slightly higher) than that price!

Priceline is way better than you think. It uses a little behavioural economics.

Here's an example of man v. machine, with machine using a little of behavioural economics to come out ahead.

Say you are in a city and want a hotel reservation near the center. You put in your price of $60 for a center city room.

The machine comes back with a rejection, but offers you a $79 hotel in the city and a $60 hotel in zones A and B, outside of the center of the city.

Most people either take the $79 hotel or accept the $60 hotel in zone A or B, figuring that $60 is the price for zone A and B, without making a counteroffer on Zone A or B, and without noticing that Priceline both changed the product (now you are looking at Zone A or B) AND used YOUR reference price of $60 for the center of the city as the offering price for Zone A and B.

When you name your price, you get committed to that price, ignoring that the PRODUCT has changed. $60 in Zone A sounds fair, doesn't it. Or is it?

Won't buyers over time just artificially depress their bids a bit to compensate?

They only give you a counteroffer if your bid is reasonably close to one they'd accept. You can take advantage of this by relaying the rejected bid and counteroffer to someone on another computer who then places a bid between those two amounts.

A few years ago, Safeway reprogrammed the change-making machines to conserve quarters. For example, if you have 40 cents change coming, you usually get four dimes instead of a quarter, dime, and nickel. It's adaptive, so sometimes you will get the quarter if the machine is running low on small change, but that's rare. This allows Safeway to reduce the overall amount of change held at the checkstands. To save one penny in interest, hundreds of customers are inconvenienced by receiving fistfulls of small change. No other supermarket chain has done this, presumably because they care more about their customers than that penny.

Maybe I am being dense; but how does it save the amount of change? 4 dimes vs. quarter + dime + nickel?

If you have nothing but small change, you can always make change for any amount. If you have nothing but quarters, you can't make change for amounts that are not multiples of quarters. The optimal strategy for minimizing the cash kept at the checkstands requires always having fewer quarters than would be required to give the smallest number of coins in change to all customers. At the end of the shift, there will be no quarters and some number of dimes and nickels. Under the strategy pursued by other supermarkets, there will be excess quarters at the end of the shift, in addition to the dimes and nickels.

And to think people are calling for medical services to be sold like groceries where the consumer knows the prices and can easily make rational choices rather that the horrible system today where medical services have many different prices based on affiliation and information based on income and assets and how desperate you are to buy.

Instead, the groceries are adopting the medical systems price obscurity and special prices for everyone designed to maximize profits.

Will groceries figure out how to charge $10,00, $8.33, $5.99, $5.53, and $3.87 for the same item all in the same day based on various affiliation and customer metric, maybe factoring what smartphone brand you are talking on or website browsed as you shop, and the time of day you are shopping? Only Mass still has a law requiring prices on items, so with lots of in-store scanners plus smartphone apps, all prices could be eliminated from the isles and milk could be demand priced - if shopping at 1:30 price it at $3.50 a gallon, but between 4:30 and 6:30pm price it at $7, discounted if loaded up with 25 items or more to $4. Or if you grab snacks from the checkout isle, lower the price to $6 - a sign in the isle says in big letters "free with milk" and in very small print "limit one free snack per $7 gallon of milk between the hours of 5-7pm on even calendar days if you are a married husband or single female, exclusion apply is you have used this offer 4 days ago or did not buy milk last week. Special surcharges, fees and taxes apply." The airline industry has much to teach grocers on how to make really high prices look too cheap to be true.

Is this an intelligence test?

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