THE LOYALTY PENALTY: WHY YOUR FAITHFUL SHOPPING HABITS ARE COSTING YOU MORE

E95 THE LOYALTY PENALTY_ WHY YOUR FAITHFUL SHOPPING HABITS ARE COSTING YOU MORE

Transcript

Dalton Anderson (00:00.876) Welcome to Venture Step Podcast where we discuss entrepreneurship, industry trends, and the occasional book review. We accept dynamic pricing for airline seats and hotels due to supply and demand. But what if that same logic applied to staple goods like milk, bread, eggs? Today we're going to be diving into what has recently been discovered by Consumer Reports, Instacart's AI-enabled pricing.

which dynamically charges customers by how much they're willing to pay. And sometimes the Delta is quite large.

Okay. I'm your host Dalton Anderson. do all sorts of stuff on the show. I like to talk about things that I'm curious about. And this thing caught my eye after talking with a potential guest named Andy, not going to name drop his full name because he hasn't gone on the show yet and I to keep him private. But Andy had mentioned this report and it definitely caught my eye and something I was curious about. So I looked into it and looked into the background and overall thought it was very interesting and I wanted to share it with the group.

I will say that I am a little sickly. I'm a sickly little boy right now. So I'm a little stuffy. I just keep that in mind if you're just tuning in. And if you are just tuning in and you do find these episodes interesting, once again, please like subscribe, especially with Spotify. They're still on my back about the amount of followers per listeners on the show. So if you find this stuff interesting or you want to help me out, please do that.

or wherever else you are on the platforms. Okay. So today's agenda is talking about how pricing became.

Dalton Anderson (01:49.336) physical stickers to these digital black boxes, talking about some of the key evidence and report and analysis thought process from consumer reports investigation, the tactics that are being utilized and were discovered from the report. And then just talking about the ethics of providing dynamic pricing towards staple goods and charging people in the same geographic area.

different prices.

Okay. So I think the first thing to talk about is background. Grocery stores are a staple within the community. People go there often, normally weekly, and they find their grocery store. They go there or they shop. And it's kind of like your local gas station where the margins on the gas is pretty low and they might have some items that are more attractive for them to sell than others. But for the most part, the margins are low and there is just

this historically. sorry. I closed my eyes and I bumped into the mic. Historically, prices, changing the prices meant like a labor cost where somebody has to go change the sticker and update everything. And you've seen something like in Home Depot, they're pretty good about it where a lot of the Home Depot prices are like digital and also has the reviews of the product. Not all the reviews, but.

the count of reviews and the one to five stars in the price. And so they update the price on the website. I'm pretty sure those tags are connected and those update as well. So there was this, there was this cost and grocery stores are always changing the price. They want to see how sensitive customers are to price changes for different products. And so they're always experimenting similar to how marketers are experimenting with

Dalton Anderson (03:52.642) different headers or thumbnails or content that resonates with their prospective customer or their funnel. And so they're always tinkering and experimenting. So that's nothing new.

What is new is dynamically charging people different price for the same thing in the same geographic area. So there's some things that you could accept, right? The price of milk went up at your little grocery store. Like before it was, I don't know, it was called five bucks and now it's $7. That's fine because everybody's paying the seven bucks. But then if you go to say,

I don't know, rural Alabama, it might be $3. Who knows? I mean, I'm just making these up. And so you live in a more expensive area, you go to Alabama and the price is cheaper. That makes sense. That's fine. But what if you were in Alabama and since you were so-and-so, you were paying seven, another person was paying three, another person was paying five? I would feel pretty hard done by that. And I wouldn't feel too, too good about it.

And that's basically what's happening. And that's really being powered by this company called Eversight. And Eversight was a company that was originally created to provide insight and quick availability of testing for price sensitivity and reducing customer surplus. Customer surplus is basically, hey, I paid $5 for this product, but I was actually willing to pay $7. And so those $2 are potentially like lost revenue.

It's how you describe it. So EverSight is really trying to reduce the customer surplus by changing the pricing and figuring out the sensitivity of the customers for their product. Where things have changed recently is the enablement of AI and these digital marketplaces like Instacart. And Instacart is working on or

Dalton Anderson (06:02.047) or is experimenting with this like AI enabled machine learning driven pricing to where one person is getting charged one thing for the same product and vice versa. And sometimes the products are 20 plus percent different on what someone else paid versus who is getting charged, which would, as I said, rub me the wrong way.

So let's dive into the report that Consumer Reports put together. It was investigation that

Dalton Anderson (06:44.013) I think they had some inklings of people reporting that maybe the prices are a little different and they had reached out to Instacart about it and Instacart was like, whoa, we don't know what you're talking about here. so then Consumer Reports put together a volunteer, like a shopping audit, and they created cohorts of volunteers in different geographic areas. had some in Seattle, some in DC and various places. The inn in this

analysis or number is only 437 volunteers in these different cohorts. And so it's not that large of number, but it's big enough to provide data that is insightful, especially when these companies aren't willing to provide that information. So the only way to get the information is a manual scraping of real consumer accounts and having people basically go in there, buy all the same products, same brand.

take screenshots of the price, and then them compiling the information.

Dalton Anderson (07:52.588) What I found a bit odd was when they'd reached out, they said, we're running some small testing and it's just, it's not a big deal or, you know, it's not, it doesn't affect everybody. And we're running it with small, a small group of partners, partner retailers. Okay. And then when they tested it, every single one of the individuals had different pricing.

and 74 % of the items selected had different prices for different people, which

is odd if you're testing it and it only affects a small group of folks. I think the biggest markup or some concrete examples was Wheat Thins in Seattle was 23 % markup for some users. Eggs in DC had a 20 % swing from $3.99 to $4.79 based on user. And then

There was like, I think there is an assumption, right, that we are all cool with getting charged more to shop on Instacart because it's convenient and Instacart has to build in their own margins. But what is not cool is this variable expense that's being pushed on to the user plus the Instacart tax. So not only are you paying for this AI enabled pricing, but you're also paying for

the margin of the Instacart costs and technology and their salaries. And then on average, a family of four could be paying around $1,200 a year more due to this algorithmic segmentation of user bases and dynamically changing the price that they're willing to pay to reduce the customer surplus.

Dalton Anderson (09:50.248) Definitely rubs me the wrong way. Not OK with it. I think this is one of the things that. Is just.

a misapplication of technology. This really doesn't contribute anything to society.

Grocers are expensive enough. The people that they're targeting are at risk and are typically older and disabled or live in food deserts. Their quotes, not mine. And so you are deploying this technology in a various ways and taking advantage of people that will most likely not understand what you're doing to them. And then you make this additional margin with your retailer

Maybe you get some kind of bonus. I don't know how it all works. Instacart isn't necessarily fully transparent about how and why they're doing this, but they did say that they do it, but it said it in small amounts, which doesn't look like the case.

Dalton Anderson (11:03.24) On a psychological aspect, they did do some stuff where they dynamically changed the price and then they had the illusion of a deal is how I describe it where say that I was buying items and my user behavior is more or less, hey, I shop the deals. I'm a big deal shopper. And maybe you are, I

more brand loyal in this example. And so we're buying the same product. We're buying, we're buying tissues and you really love Kleenex and I'm, down to buy whatever deal I got. And so on mine, my website, my account, I might see Kleenex 50 % off, off the price. And then you might see, I don't know, 10%.

And so they'll increase the price of my Kleenexes and say they'll make it $10 and then. OK, so let me just a quick math. So 50 % of that. OK.

So my Kleenex at the total price would be five bucks. And then if yours was 10%, then yours would be 550. And so my price, my listing price was 10. Yours was 550. Yours was 10 % off, makes it $5. Mine was 50 % off, which makes it $5.

I have the illusion that I'm getting a great deal because the price is artificially increased, increasing the discount, although the discount of the item is the same.

Dalton Anderson (12:55.852) That I don't like either. And so not only is there a manipulation of the price, there is also a manipulation of the discounts as well. So you don't really know what is true. It's just basically telling you what is most optimal for you to buy more stuff, which might be great for companies, but not necessarily good for people and the communities that they serve.

And so the whole thing is counterintuitive where as a grocery store, like the biggest thing that you want to serve as your community because you're a cornerstone of your community and this whole bait and switch of your coupon, the coupon trap, it's something that is a known strategy, but to be doing that at an individual basis, I think is a little bit new. I know that people do understand like on Black Friday, they might see a crazy deal and

they increase the discount and artificially increase the price to get it back down to whatever it was. That's a known thing. But what isn't known is you're walking in Walmart and then I just don't know where this thing stops. Like, are we going to be dynamically charged on our apps as well in a material manner to where like just because what you do and

maybe gets down and nitty gritty because it's black box. it's whatever data you feed in there and all this personal data. It probably gets to the point to where it's predatory. It's predatory price manipulation of goods, of staple goods that people need on a day-to-day basis.

Dalton Anderson (14:44.792) Gross, the whole thing is gross. I'm not a huge fan of it. And I'd mention it a little bit was it seems like it's moving towards this surveillance pricing or this surveillance algorithm where you've seen that not go so well with some of the stuff that airports have tried or police units have tried where they try to define who is guilty or who is likely to commit a crime.

or who is likely to be a terrorist, like this classification model using their facial features and I guess what clothes they're wearing, et cetera, et And what happened was it was discriminatory profiling. And...

I could see the same thing going on here to where you get to a place where everything is overly optimized and there is limited to no customer surplus. And you are in a place where you have to pay whatever the algorithm is paying. And maybe there's this thing where companies come out with pricing transparency.

And there's a big push for transparency and a push for a anonymous profile to where Instacart doesn't know who you are, doesn't have your pricing behaviors. Or it's maybe like something like a Tor browser vibe to where it takes everybody's pricing behaviors for the whole cohort of individuals across different geographic areas and different purchase behaviors.

And then it so just jacks with the algorithm too much and the algorithm breaks.

Dalton Anderson (16:31.736) Like there's just a whole thing about it. It uses your phone type. It uses your shopping behavior. It uses where you live. Most likely what you do.

And I can't see this going in the right direction. Like this is something that isn't going to be copacetic for pretty much anybody besides the people who benefit, which is limited to a small group. And I think it's disappointing that big companies are willing to do these things on a

scale like this because they're saying that they're not involved. Like it's a weird thing where one of them was one of the examples was used was Target and contacted consumer reports, contacted Target and Target was like, hey, we have no formal business relationship with Instacart. We don't know what you're talking about. But then Instacart said that, well, we don't set the prices the businesses do. So I'm not really sure what the real truth is. mean, the report came out last week.

So there isn't probably a follow-up, but it was a bombshell report where it was very surprising, the discoveries and just where we're at and where we're going, especially the, I guess, proxy discrimination of targeting people that are.

disabled or live in food deserts, like people that are at risk or folks that are loyal to different brands. Your loyalty has a penalty now. Whereas if you're consistently purchasing these products and the specific brand, like if I bought Tenex, Kleenexes every time, no matter what, well then I'll pay a higher price for Kleenexes. And that's what the algorithm is going to assume. That's what it's going to do. And then before you know it, I'll be paying more for Kleenexes than everybody else.

Dalton Anderson (18:39.246) It just.

like they're essential goods and we're treating them as their luxury goods. And I get the supply and demand aspect. Like that makes sense. As I said, airlines, like there's limited space on the plane. Less space means higher price. Well,

Dalton Anderson (19:04.236) Yeah, airlines can't charge you more because you are a software engineer versus you are a soccer coach or something. You don't get charged more. It's just supply and demand. But within SCART, that's what they're trying to do, which as I said many times rubs me the wrong way. So.

think the next steps of where we're going is there needs to be a push for pricing transparency and there needs to be push back on consumers saying like, like we're not good with this. Like if you guys are supporting this, then we don't support you type of thing.

because it is similar to surveillance pricing, but just on your behaviors. Okay. Well, I appreciate you and everything that you guys do. I really thought this was interesting. I'll link the article in the show notes so you have it. And if you are interested in reading the article, then you can. But of course, wherever you... Sorry, I had a cough.

course wherever you are in this world, good morning, good afternoon, good evening. Thanks for listening and listen in next week. Goodbye.