Amazon Error May End 'Dynamic Pricing'

In the space of two weeks, online retailer Amazon.com has been forced to apologize, issue refunds and appease angry customers after it was found to have charged some people more than others in random price testing on its Web site.

With the virulent reaction of Internet-savvy customers, and Amazon.com’s rapid decision to drop the tests, those tempted to offer different prices to different customers online had better think twice.

Amazon.com has faced allegations — which it denies — that the different prices were based on customer data, such as where a person lives and how much he or she might have previously bought at Amazon.com.

“We’ve never tested and we never will test prices based on customer demographics,” founder Jeff Bezos said in a news release Thursday.

Consumer-Friendly Net

Online retailers in general may never get the chance to do so, since customers have proven to be sharp-eyed when it comes to price. The Internet itself encourages comparison shopping, and swapping of information by consumers.

“With popular sites like Amazon, you really can’t get much past the consumers anymore,” said Tom Wyman, electronic commerce analyst for J.P. Morgan. “They’re out there trading notes all the time, looking for the best deals.”

The problem started a few weeks ago, when Amazon.com customers who bought digital video disc (DVD) movies began comparing notes online. The media picked up on the disparity, forcing Amazon.com to admit it had been conducting random price tests.

Amazon.com spokesman Bill Curry said the tests were useful in determining a price point — the right balance between how much Amazon.com could charge and still maintain a good sales volume. Nevertheless, because of the consumer outcry, Amazon.com ended up refunding 6,896 customers an average of $3.10 each, or a total of $21,377.60.

Amazon.com has no immediate plans for more random testing, but Curry wouldn’t rule it out in the future. He said customers involved in any test would get a refund if they paid more than the lowest price used in the test.

Privacy Issues

Such pricing tests have privacy advocates concerned, since consumers have only a company’s word and their own observations that personal information isn’t used.

“Certainly, the Internet is wonderful for trading information for consumers,” said Jason Catlett, president of the advocacy group Junkbusters. “And, Amazon.com is under a tremendous amount of scrutiny. But until the U.S. adopts laws protecting the use of consumer information, many of these companies won’t get caught misusing this data.”

The idea of so-called dynamic pricing isn’t new. Stores in well-off neighborhoods may charge more than stores in poorer areas for similar goods. But the vast databases of the Internet create the possibility of targeting prices directly to individuals, based on their billing information and purchasing history.

Wyman said Amazon.com’s misadventures may help to prevent widespread use of such practices.

“Most e-commerce sites right now need to charge as close to the suggested retail price as possible. They need the money,” Wyman said. “I think the days of deep discounts are done. And dynamic pricing really only works online when you’re below the normal retail price.”

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