Viacheslav Sabirov, CEO of BATNA, discusses the prospects of bringing back bargaining into modern retail.
People have bargained when buying and selling goods throughout history, as bargaining is fundamentally beneficial for both the buyer and the seller. The buyer's advantage is obvious: they get a chance to buy the product cheaper. With the seller, things are a bit more complicated. Their pipe dream is to extract the maximum amount of money from each buyer that the buyer is willing to pay for the item. But how do you know exactly how much a specific customer is ready to pay for a specific pair of light-grey jeans with a ripped knee?
Every buyer evaluates a product differently, especially when it comes to consumer goods like clothing. People perceive colors differently and compare the product offered for purchase with a unique set of other items they have seen from other sellers.
A modern retailer often ignores the individual characteristics of buyers (because they don't know how to account for them) and sets fixed prices for their goods.
When choosing a fixed price, it's very easy to "miss" the optimal point on the demand elasticity curve and lose either turnover (if the price is too high) or margin (if the price is too low). The situation is further complicated by constantly changing demand due to changes in any of a huge number of factors: from the weather to a sudden replenishment of a competitor's assortment.
To find the optimal fixed price, entire analytical departments build complex models (and complex doesn't mean accurate!). Even if we assume that the retailer somehow miraculously guessed the optimal fixed price, by setting it for all buyers they still lose conversion (since some customers who valued the product lower refuse to buy) and margin (since some customers who have already bought the product might have valued it higher and been willing to pay more).
When a seller abandons fixed price tags and allows customers to bargain, conversion and margin grow, and turnover approaches the optimum. In the course of bargaining, the seller can also move beyond discussing a single item and offer a compromise price conditioned on the customer buying an additional product at a reduced price.
As a side product of bargaining, the seller gets constant clarification on how their own audience values each product and, accordingly, knows which items should be sold cheaper (and by how much) to avoid a huge remainder by the end of the season or shelf life. This also helps avoid emergency sales, preserving margin and face in the eyes of customers. After all, any regular public price reduction inevitably leads customers to be less willing to buy from you at full price and to wander into a competitor's store while waiting for a sale.
This expectation of a "discount season" is what bargaining has devolved into in modern retail. The situation is absurd: a potential buyer silently waits for the seller to lower the price to the level the buyer wants. Instead of agreeing on a mutually beneficial price right away, everyone just waits.
The short answer: bargaining is hard to scale.
The long answer: for bargaining to happen, a retailer must dedicate time from their sales staff for negotiation with each customer. Each seller must keep in mind information about the demand for every one of the hundreds or thousands of products in the assortment, and simultaneously and effectively determine the maximum price the customer is willing to pay. And in parallel, such a salesperson will also have to fend off many cunning customers who ask for a discount even though they are willing to purchase at the full price.
Certainly, there are sellers who can do all this more or less effectively, but they are few and they are expensive. As a result, a large retailer is unable to bargain well, and with poor bargaining, all potential advantages are negated. Therefore, it is more profitable for the seller to fix prices, which is what all modern, even moderately large, retailers do.
When it comes to non-fixed prices, there are several types of solutions:
Dynamic pricing offers the most optimal price, balancing supply and demand in real time. Optimality is calculated differently by each seller: for example, based on demand, competitors' actions, seasonality, or, as with Russian Railways (RZD), the date of purchase (the closer to the departure date, the higher the demand, and the fewer free seats remain, the more expensive the ticket). Despite the fact that such pricing helps monitor the market and sell profitably, there are a number of negative aspects.
Constant price changes can cause distrust among customers towards the company and its brand. Therefore, large marketplaces like Yandex.Market and Wildberries display the product's price history to increase loyalty. But even this step doesn't always help, as there can be uncontrolled spikes in demand.
In the case of partially personalized pricing without bargaining, a discount is provided to the customer (for example, via e-mail) based on their previous purchase history. The drawback of this tool is that if personal offers are constantly sent, the product without them will already be perceived by the buyer as expensive, and shopping will be postponed until the next promotion.
Price discrimination stands apart, where, for instance, an iPhone owner pays more than an Android phone owner. This approach is particularly favored by some taxi aggregators.
Today, on the websites of some sellers, buyers can offer their own price.
Bargaining is available, for example, on Ozon, but the effect of its application is very limited. The bargaining range is a maximum of 5%, and discount requests are processed manually by sellers, which, on the one hand, delays the purchase process, and on the other hand, in the absence of personal communication between the seller and the buyer, does not allow for assessing the seriousness of the buyer's intentions, and therefore, the actual necessity of providing a discount. As a result, bargaining is rarely used and, in our opinion, leads to nothing but a loss of margin.
There are other examples of bargaining implementation in the market. On the Greentoe marketplace, the buyer selects a product and names the price they are willing to pay for it. The platform determines whether the offer is profitable for the seller and sends the proposal to its suppliers, which include both large stores and small dealers. If someone accepts the price offer, the transaction is made directly with the buyer. Internet retailer Amazon wanted to implement a similar scheme back in 2014 when it announced the launch of the "Make an offer" option for a number of goods. This function is currently unavailable.
The drawback of platforms like Greentoe for the buyer is the limited set of products available for bargaining. You have to choose from what is available. The drawback for suppliers is that bargaining is conducted manually. It is likely that this is why Amazon's innovation did not work out. Spending human effort on negotiations in the age of automation and robotization is not the best solution.
The British company Nibble decided to avoid this mistake when creating their version of bargaining for sellers in e-commerce. They developed special software that integrates into any website and determines which product a buyer has paused and pondered over. If the customer continues to hesitate and does not add the product to the cart, Nibble automatically opens negotiations, without analyzing the demand for the product in stock. The sellers manually pre-set which prices the chatbot will reject and which it will accept. This solution increases conversion but negatively affects margin.
Moreover, it would be better for retailers if bargaining occurred both online and offline. Imagine a buyer offering their price either in an online store or by scanning a QR code on a physical price tag in a boutique. The baton is then passed not to a human, as in the case of Greentoe and Amazon, but to a robot. The program evaluates the available data on the product (inventory dynamics, time remaining for sale, customer offer statistics, etc.) and either agrees to the reduced price or makes a counter-offer, which includes the requested discount on the condition of buying an additional product personally selected for this customer. The product or list of products offered are those that are not selling fast enough in the store.
It turns out that such bargaining is built on a "smart" dialogue. And the increase in margin is achieved by having the opportunity to shift the bargaining into the sphere of other goods. This is how the BATNA system works, for example.
One of the main global trends in retail development is personalization in literally everything. In our opinion, high-quality personalization cannot be achieved by relying solely on passive analysis of big data about buyer behavior. It is much better to enter into a direct dialogue with the buyer. And if the dialogue is not too tedious, any customer will gladly tell you what can be done to satisfy their needs, and will probably even give you the secret of how to earn more from them.
