Blogs

The Internet of Things and the end of price tags

Post Comment
Product Manager IoT Division - Connected Products, IBM

You’ll never pay the same price again—in fact, you’ll never want to.

If you live in a large American city, you’ve probably heard of the company Uber; indeed, you may have likely used this service. I ride Uber all the time because it’s convenient, it’s better than waiting for a cab in San Francisco and it’s deducted from my credit card, so no cash is required.

Uber has an interesting feature called “surge pricing,” but what does this mean?

As the company explains it, “Uber rates increase to ensure reliability when demand cannot be met by the number of drivers on the road. Our goal is to be as reliable as possible in connecting you with a driver whenever you need one. At times of high demand, the number of drivers we can connect you with becomes limited. As a result, prices increase to encourage more drivers to become available. We take notifying you of the current pricing seriously. To that end, you’ll see a notification screen in your app whenever there is surge pricing. You’ll have to accept those higher rates before we connect you to a driver.”

http://www.ibmbigdatahub.com/sites/default/files/blog_iotpricetag_blog.jpgThe Washington Post had a great write-up on surge pricing in which author  wrote, “...price surging can work in any of three ways: by reducing demand for cars (less people want a car for a higher price), by creating new supply (providing an incentive for new drivers to hit the roads), or by shifting supply (drivers) to areas of higher demand.

“The data I collected suggest that surge pricing doesn’t seem to bring more drivers out on the roads, but rather pushes drivers already on the job toward neighborhoods with more demand—and higher surge pricing. As a result, some neighborhoods are left with higher waiting times for a car.”

The Planet Money podcast dedicated eight minutes to the notion of static pricing, haggling and the history of the price tag, and it got me thinking: How will the Internet of Things affect the way products and services are priced?

In the podcast, they describe a scenario where the Coca-Cola Company noticed that when the forecast called for a hot temperature, they sold more cans of Coke. In response, Coke raised their prices on hot days—but people revolted because they do not like paying more when demand it. They felt Coke was taking advantage of them. Uber has had similar bad publicity, in particular during Hurricane Sandy, which hit New York in 2013. I was living in Manhattan at the time, and I can recall people taking Uber a mile or so and being charged over a hundred dollars. Citizens were outraged.

My question is, what’s wrong with variable pricing? It’s supply and demand. The airlines have been able to change seat pricing since 1980 based on supply and demand—and cars, homes and professional services all have variable pricing based on supply and demand. Also, in many cases, pricing is based on what the seller thinks the buyer will pay; look at sites such as StubHub and eBay.

To put this in context, it’s important to point out that the notion of fixed pricing is a relatively new concept. Throughout most of history, everything was done through haggling. For example, if you wanted to buy five sheep at a market, the sheep owner would then set a price based on how much he thought he could get you to pay. You and the owner would haggle back and forth until you felt comfortable with the price, and then you’d purchase. If someone else showed interest in those same sheep, perhaps the owner assumed you couldn’t afford them, so the starting price might be lower to keep from scaring you off. With a lower entry-level price, it’s easier to haggle based on how much you can spend.

Later, the Quakers felt a moral obligation to charge everyone the same price, regardless of what the individual could afford. This notion was embodied by two Quakers in particular: Rowland Hussey Macy and John Wanamaker (if you’ve never heard of John Wanamaker, I highly suggest spending some time reading about him). Both these men eventually started their own eponymous stores, and both had fixed prices in the form of price tags. From there the notion of fixed pricing gained momentum, and here we are.

What does this have to do with the Internet of Things? A great deal, I’d say.

In reality, no one is really paying fixed pricing. At supermarkets, you’re paying membership prices, which are technically discounted prices on marked-up items to run price-sensitivity experiments on customers. E-commerce and digital marketing sites constantly make offers in the form of flash sales, new season sales or “warehouse clearing sales”—all designed to learn about specific customer segments and their sensitivity to offers and price points.

Uber can surge effectively because they understand in real time what the supply side looks like in comparison with real-time demand. In fact, it’s all automated using a sophisticated algorithm. Because of this, Uber can initiate surge pricing without losing business. People may be angry that they’re paying more for a ride that usually costs much less, but Uber still uses surge pricing—and the company is still growing.

What the IoT adds to this equation is providing unprecedented insight into real-time and future “demand” while also being able to connect sellers with buyers with high levels of efficiency. As Veena Pureswaran, design optimization engineer at IBM, writes in “Device democracy – Saving the future of the Internet of Things”:

“The IoT creates the ability to digitize, sell and deliver physical assets as easily as with virtual goods today. Using everything from Bluetooth beacons to Wi-Fi-connected door locks, physical assets stuck in an analog era will become digital services. In a device-driven democracy, conference rooms, hotel rooms, cars and warehouse bays can themselves report capacity, utilization and availability in real-time. By taking raw capacity and making it easy to be utilized commercially, the IoT can remove barriers to fractionalization of industries that would otherwise be impossible. Assets that were simply too complex to monitor and manage will present business opportunities in the new digital economy.”

She continues: “By identifying and matching supply and demand for physical assets and services in real time, the IoT will create new marketplaces. These complex, real-time digital marketplaces will build upon the foundation established by mobile devices and social networks to expand the reach of this transformation very quickly. They will enable new peer-to-peer economic models and foster sharing economies.”

Part of what Veena is saying here is that by digitizing physical assets, we unlock unused capacity while simultaneously making that capacity easily monetized—or as she puts it, “utilized commercially.” What Uber did was unlock the unused capacity of people willing to drive strangers around, and easily connected those people with other people looking to go somewhere and willing to pay for it. The IoT will likely enable the Uber model across many new industries, and with it the notion of fluid pricing models.

I’m not saying that everything will revert to the barter system in the future; part of the problem with bartering is that it takes too long. It’s not reasonable or efficient to expect people to haggle over every purchase. Furthermore, I’m not arguing that in the future all pricing will be fluid. However, I would submit that in the future, far more products and services will be priced based on current market conditions, where the word “current” refers to market conditions minute by minute.

Consider this use case: You land in Dallas for a meeting with a client. You pick up your rental and are charged less than normal, a discount based on the average speed, RPMs and speed in which you make turns. The rental agency has a driver performance profile on you, and you’ve just saved a bit of money based on your driving style, which doesn’t put much wear and tear on the asset (car). You are asked if you’d like insurance on the car; you accept and are told that to insure the car for the day will cost three times what you normally pay. The reason? This year you opted for an insurance plan that allowed your insurer to collect a variety of attributes measured by your wearable—the insurance company is aware that last night you drank four or five glasses of wine, and slept only three hours before getting on the plane. You also have a great deal of anxiety, which is also being determined by the wearable through a number of measurements being analyzed in aggregate.

Imagine organizations realizing their office spaces are significantly underutilized. Through the deployment of IoT technology, these clever companies can create a real-time, “rent-an-office” business on specific floors of the building. What if a businessperson traveling needs a conference room for an emergency meeting and presentation, but isn’t within an office? No problem; jump on the AirBnB of office space and there you go. You secure a cubicle, a conference room and a projector all in minutes, complete with a map and a custom badge that works with building security.

Retail stores and shopping malls are doing similar things with presence zones and beacons today, using mobile push notifications with discount offers to compel window shoppers to come back and buy that new tablet or jacket.

Plus, there are mobile app companies that let sports fans attending an event barter in real time to exchange tickets during the game. Imagine sitting in the front row at a basketball game, listing your ticket online to see who’s willing to pay, and finding a buyer 20 rows back who will pay $1,000 to trade tickets for the remaining three quarters. I’ve heard this called “the uberfication of markets,” but I prefer Veena’s description of the “liquification of markets.” It’s happening all around us, and the IoT will only accelerate this process.

The truly intriguing idea, which Veena also mentions, is the notion of devices bartering amongst themselves. Much in the same way travel sites locate cheap fares for you, while other websites offer analysis on whether prices may rise or fall, it’s quite likely in an IoT future we’ll have personal purchase broker applications that act on our behalf, seeking out deals and assisting us in this new IoT future where prices are changing minute to minute. I can’t wait.

What do you think? Let me know. I’d love to hear from you @peter_ryans or on LinkedIn.