Staples (SPLS): Yield Management? We’ve Got That

By Jan 4, 2013, 11:02 AM Author's Blog  

A midrange Swingline stapler from Staples.com costs $14.29 – if you click “buy” in Scarsdale, N.Y. Twenty miles south, in Manhattan, the same stapler shows up costing $15.79.

Staples (SPLS), along with other retailers, has taken online personalization to its logical limit, tailoring not just which products it suggests to specific customers, but what it charges for those products as well, according to a recent investigation by The Wall Street Journal. (The article is located behind a pay wall).

The Journal found that prices varied based on IP addresses for around one-third of the more than 1,000 randomly selected Staples.com products it tested. Most of the price differences appeared to be based on the customers’ presumed zip codes. Customers in areas with competing office supply stores generally saw lower prices, while those without alternate brick-and-mortar options saw higher prices. On average, the discounted prices were 8 percent lower.

Staples confirmed that it offers different prices to different users on its website but did not give a detailed explanation of its online pricing algorithms. Discover Financial Services, Rosetta Stone and Home Depot were also found to alter online pricing and product offerings based on user characteristics.

There is no law against charging different prices in different places or to different people for the same things. To see proof of this, just try visiting the airport version of your favorite fast food chain or asking the person next to you once you get on the plane what she paid for her seat. A 1996 case in federal court in New York held that there was nothing wrong with Victoria’s Secret mailing out multiple versions of its catalogs that showed the same products, but different prices. Nor is there any law – yet – against gathering information online about customers and potential customers for commercial purposes.

But many shoppers’ gut response is still that outright price-adjustment based on electronic information is unfair. In a poll cited by the Journal article, more than three-quarters of Americans said they would be bothered if they knew a website was offering others lower prices.

Part of the sense of outrage may stem from an apparently unintended consequence of Staples’ pricing strategy. By basing its prices on the availability of shopping alternatives, Staples ends up showing higher prices to customers in lower-income areas, which can support fewer large retail stores. Customers in more affluent areas, meanwhile, get discounts. This can result in the appearance of price discrimination on the basis of race or national origin, which is illegal.

Staples’ pricing in New York City, however, suggests that access, not income, is the company’s real target. Despite the fact that Manhattan is the most affluent of the five boroughs, customers there pay more for their paper and paperclips than shoppers in Brooklyn and Queens. While the Journal reporters did not offer an explanation for this difference, my guess is that it has to do with space and tolls. Many Brooklyn and Queens neighborhoods have most of the characteristics of middle-class suburbs, including space for larger, suburban-style stores. Residents of Brooklyn and Queens also have the option of driving to authentically suburban Nassau County on Long Island without facing tolls.

Meanwhile, shoppers in the other New York City outer boroughs, the Bronx and Staten Island, pay the higher, Manhattan-style prices – the Bronx, I presume, because it continues to be underserved by most retail stores and Staten Island because its geographically isolated shoppers are bounded by toll bridges.

Although few consumers realize it, online price customization is not new. As early as 2000, Amazon faced a wave of negative publicity when users discovered that customers looking at the same item saw different prices. Amazon claimed the variation was random, not based on customer profiles, but many customers were unconvinced.

It’s also possible for online retailers to tailor their offerings far more carefully than Staples appears to. Available software can generate sophisticated customer profiles based on browsing histories, allowing companies to hypothetically charge those who routinely peruse designer goods more, while still giving regular bargain hunters the low prices they are bound to seek. Although it claims not to adjust prices, the travel website Orbitz has even admitted to using software that detects what kind of device a customer is using to access its site and then recommending hotels it thinks are best suited for either Mac or PC users.

While I do not have any particular desire to pay more for products based on my viewing history or address, I also don’t see anything wrong with companies trying to charge me as much as they think I will pay. Ultimately, it is the customer who makes the choice of whether or not to buy. If a price seems too high, online shoppers are free to look elsewhere, and on the Internet, the next store is never more than a click away.

Whether we like it or not, the mission of most businesses is to maximize revenue and profits, not to determine the “true” price for an airline seat, a hotel room or a stapler and to ensure that everyone pays it. Airlines, which have more experience than office supply stores in anticipating and responding to the behavior of particular customers, have coined the term “yield management” to describe this process. As the name suggests, the goal is simply to maximize yield, or profits; retailers have no nefarious plan to punish Manhattanites or reward suburb-dwellers.

We have already become accustomed to yield management when it comes to airline prices. I suspect that, with time, shoppers will come to accept that now Staples carries yield management too.

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