Could "Make An Offer" Pricing Ever Work In-Store?

Should major chain sites use "make an offer" pricing? It sounds heretical, but it's being considered at several major chains. The most interesting argument is that it's a great way for retailers to circumvent minimum advertised price (MAP) restrictions. But could it boost sales of slow-moving SKUs? Even more outlandish, could it move more top-selling items?

This discussion, though, is really about a much more strategic and fundamental issue. With showrooming and reverse showrooming and everything in between, does the very nature of retail Web pricing have to be rethought? Once the price comes off the Web page, everything is up for discussion. Customized pricing? Pricing based on how generous shoppers have been with their last five purchases? Is this another way to ditch the bottom-feeder bargain hunters? Will chains offer deeper discounts to people who shop with a short list of their most direct rivals? Will charge a lower price to someone coming to its site from an Amazon visit as opposed to a Barnes & Noble visit? And could this flex pricing ever make the transition to in-store, leveraging mobile?

The way it works is simple. The merchant tells the system—based on a wide range of criteria—the products it wants included. It might be "any product that stays in the list of the slowest moving products for three days." The widget then displays an icon instead of a price for those products, with the icon likely saying "Make An Offer." The shopper gets one shot at making an offer, and then the retailer gets one shot to accept, reject or counter the offer. (For a smaller retailer, the responses could be manual. But for most retailers, it would all be automated based on criteria, such as "Accept any bid of $15 or more. If it's between $12 and $14, decline, but offer 20 percent off if they purchase within 24 hours."

One company gathering a decent amount of attention in this space is a vendor called Netotiate. Netotiate CEO Amir Farhi said he sees a huge difference in pricing strategy with major chains, and then with midsize and smaller chains. "As the chains become smaller, they get less arrogant about their pricing," Farhi said. "It's a pride thing that the retailers have."

He argues that the art of haggling in retail is standard fare in much of the world, especially the Middle East, China, India and Turkey. It's even second nature in the U.S., for things like car purchases. But for Walmart, Target and Home Depot?

Farhi said this system enables customized pricing, but it can be—at least initially—for legitimate reasons. "It's all about variable margins and price discrimination. But you can discriminate for all of the legit reasons. The retailer can decide what prices to offer based on who the customer is?" he said.

This difference is not so unusual. It's been done with the airlines for decades. And two people walking into the same bank and trying to borrow the same amount of money are treated very differently. "Person A and Person B. Will they get the same loan and the same interest rate?" Farhi said.

The unstated issue is that the power to set prices based on legitimate issues also empowers marketers to set prices for truly discriminatory issues. Then there's the "ability to pay" debate. If the system knows this shopper just purchased a ruby necklace for $98,000 and $110,000 worth of boat equipment, is it acceptable to charge that person a higher price than anyone else? (Reality check: It's not like car dealers haven't sized up customers for years and done the exact same thing.)

The simplest way to discriminate legitimately is to use that shopper's prior haggle history. "If the customer keeps lowballing and doesn't follow through, retailers can ignore (his/her) offers. Netotiate knows what the consumer's score is," Farhi said. Differentiated online reactions to different customers is something that UK retail giant Tesco has already played with, using both mobile records and social site activity.

All of the "name your price" vendors handle matters differently. Netotiate's current arrangement is to take a 2 percent cut from every item sold, but Farhi said his company "may be adding a subscription model," and then said his firm is "likely switching to a subscription model."

As long as we're thinking through retail pricing assumptions, could this ever work in-store? It might work with mobile devices enabling the back-and-forth, but there could also be an interface by selected products enabling the same thing. Interestingly, this is a case where the anonymity of the Web could minimize conflicts. If two customers get different pricing in-store—and heaven forbid let it happen in mid-December with a much-sought-after toy—fisticuffs could happen.

Could it work the other way? When that especially hot holiday item is running low, why not make the pricing "make an offer," and then let the shoppers who are willing to pay the most get those last 15 in stock?

Psychology absolutely comes into play with pricing, and it always has. A retailer currently selling a particular item for $149 could simply declare the price is now $170, and then say "Make an offer" and program the system to accept any offer of $149 or more. In theory, other than the 2 percent haircut to the vendor, it would be hard to lose money that way unless—and this is the ballgame—customers don't feel like playing this game and opt instead to hit Amazon.