Saturday, September 27, 2008

Analyzing the value of pricebots

Here's an exercise that I did for Economics of Information at MIT Sloan that shows the value of pricebots. The item that I was searching for was an Apple iPod Touch 8 GB (2nd Generation) including shipping (assumed). The key insight coming out of this is that pricebots can provide a user with significant value for their time. The one I especially liked coming out of this that I didn't know about before was MySimon, which I found very intuitive and easy to use.

First, I searched a few random sites for prices:

Amazon.com $219.52 58 seconds
eBay $189.95 65 seconds
BestBuy.com $229.99 23.8 seconds

Amazon: It was confusing between the 1st and 2nd generation 8 GB iPod touch. Actually, I came back later and found $210 + $4.99 shipping from a just launched Amazon Stores vendor. Regular Amazon unit ships in 8 to 9 days.
eBay: In the initial view, it is hard to separate between the Auctions and “Buy it now”. I chose to look at the Buy It Now prices rather than bid through any auctions. I’m pretty sure this is a 2nd generation one that I found at $189.95 that includes shipping but not completely sure.
BestBuy: Very fast and intuitive search, but the highest price.

Pricebots

I just took a look at two pricebots and ran the quick analysis for price dispersion and the "wage" given for using the engine.

PriceGrabber
Best Price: $219.95 from PC Connection 2 minutes and 4 seconds
I was a bit confused by the interface and ended up looking at used/refurbished units before going back to find the link to the new units.

Prices:

Circuit City: $229.99
PC Connection: $219.95
Best Buy: $229.99
PowerMax: $228.88
Vann’s: $229
iUnitek: $229
Abt: $229

MySimon.com
Time required: 44 seconds

$219.95 from PC Connection (best in stock price)
Amazon.com: $219.94 (Listed as out of stock – actually 8 to 9 days)
Apple $229.00
Circuit City: $229.99
Best Buy: $229.99
Abt: $229
Vann’s: $229.00
iUnitek: $229 (Out of Stock)

Interesting comment: Amazon’s prices show up as $219.94 on both these sites, but $219.52 on their site. Not sure what accounts for the minor difference.

At least with this example of the 8GB 2nd generation iPod touch, MySimon and PriceGrabber didn’t come up with radically different prices.

Absolute Dispersion: MySimon: Highest price was $229.99, lowest, $219.94 if you are willing to wait a few days. $229.99 - $219.94 = $10.05. On PriceGrabber, it was $10 - $229.99 - $219.99.

Relative Price Dispersion: Price dispersion is 4.3% for PriceGrabber and 4% for MySimon.
Mean Market Price: $227.98 for PriceGrabber, $226.98 for MySimon.com.

Shopping Wage per Hour

PriceGrabber: ($227.98 - $219.99) / 124 seconds = $7.99 / 124 seconds = 6.4 cents per second
MySimon: ($226.98 - $219.99) / 44 seconds = $6.99 / 44 seconds = 15.9 cents per second

3600 seconds in an hour so the hourly wage of using these sites as opposed to selecting a random vendor:

PriceGrabber: 6.4 cents * 3600 = $230.40
MySimon.com: 15.9 cents * 3600 = $572.40

Quite striking if you think about it this way. If I hadn’t gotten slightly lost on the PriceGrabber initially, the numbers probably would have come out similar in terms of the shopping wage per hour. My first choice for electronics is often Best Buy, so if I remembered to use a search based pricing engine, I might save a few dollars. Note that eBay didn't come up in either engine.

Analysis and Commentary

The iPod touch example is a bit of a generic one since it is such a mainstream product. I can imagine that if I were searching something odder, the value might even be higher as the natural price dispersion might be higher. For instance, some of the designer furniture that I often find myself hunting for in a cherry finish to match the rest of the items in my apartment.

This has pretty interesting implications for competition. We know that the web has put the power in the hands of the consumer, but the interesting thing is how to take advantage of it. Interesting that Amazon’s price is cheaper than all the others by a nickel on the search engines (though due to the 8 to 9 days to ship, it looks like they treat that price as out of stock and drops it to the bottom). This seems pretty genius when you actually think about it. I don’t doubt that Amazon has a pricing engine that looks at the prices on the web and undercuts others, assuming a set margin can be maintained. Combined with their operational excellence, this should allow them to capture a pretty substantial portion of the market without going any lower than they have to. The problem is that if other vendors do this, the price will be driven down to either marginal cost or the minimum acceptable price for each vendor.

Also, it seems to me that you would want to be able to charge people who come directly to your site more since it may be implied they are shopping on brand or for convenience. This may mean offering coupons to lower the price when people are using pricebots or some other way to differentiate between these two types of customers that would be acceptable in the minds of customers.

Of course, price isn’t the only factor. Quality of service, speed of delivery and ability to return items also matter to me. Sometimes using these pricebots, especially when searching for a less mainstream item, some of the best prices come from smaller Internet retailers. This is especially true with eBay – quality of service varies greatly, and I’d rather pay a few extra dollars knowing I can avoid a lot of hassle if there is an issue with the order. The $189.95 option leaves a lot of questions unanswered. I suppose I could e-mail the seller and ask, but that’s sort of a pain. That makes branding and track record more important. It can break ties or make the difference with price dispersion is low as with this example. For instance, if Vann’s at $229 and Best Buy at $229.99 were the lowest prices, I’d probably still buy from Best Buy as I haven’t heard of Vann’s. The fact that Vann’s has a number of good reviews and a high customer satisfaction on the site helps. Especially when getting into lesser known retailers, the reviews that pricebots have compiled on various vendors are helpful.

I want to throw one more pricebot that I use: Upromise. I probably use it more than any of the others out there. Upromise has a decent pricebot, but also provides me with a kickback into a “college savings fund”, ranging from 2% to 10% of the purchase price. Over five years, I have saved about $1,000 in my Upromise account. For some reason, this type of value add for me is more of a hook than the “hourly wage” way of thinking about it. However, I went on Upromise and searched for the 8GB touch and was thoroughly confused by which generation I was getting. So maybe I should forget the couple dollar kickbacks and use MySimon, which struck me as intuitive, comprehensive and well-designed. Maybe UPromise should just buy software from one of the other guys out there and integrate it.

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