An experiment on Instacart allowing retailers to use AI to set prices could backfire, leading consumers to abandon the platform in favor of less expensive options, experts told The Food Institute.
The Federal Trade Commission has opened an investigation into Instacart AI pricing practices following an investigation by Groundwork Collaborative, Consumer Reports and More Perfect Union that found the practice added $1,200 in annual costs for consumers, Reuters reported.
The FTC said it was disturbed by the allegation. Reuters, quoting sources, said the agency had issued a civil investigative demand for information about Instacart’s Eversight pricing tool.
Instacart argues the variable pricing is not its fault. Rather, it’s the retailer setting the pricing, FreshFruitPortal.com reported. Retailers use Eversight to test price sensitivity.
Consumers, already buffeted by inflation and overall economic conditions, likely don’t care who is ultimately responsible for the pricing strategy.
“Consumers are very unlikely to accept this sort of action from platforms and retailers,” P.K. Kannan, dean’s chair in marketing science, Smith School of Business at the University of Maryland, told FI.
“Price-sensitive customers are more likely to reduce their transactions on Instacart and use it only when it is absolutely necessary rather than using it as a matter of habit. Some may switch to retailers who offer transparent pricing.”
Deidre Popovich, associate professor of marketing at Texas Tech University, said Instacart is likely to take the bulk of the blame.
“This is especially true now when consumers are very aware of overall rising prices for groceries and other necessities,” Popovich said.
“Consumers perceive price unfairness and a lack of transparency as a breach of trust,” the marketing expert noted.
Popovich added that, in the aforementioned scenario, consumers may feel taken advantage of and care more about their data privacy if they think apps are using data to drive pricing decisions.
FreshFruitPortal.com said the analysis examined 437 shoppers around the country, comparing prices on 75 items purchased at such retailers as Target, Costco and Kroger. Cost variations were as high as 7%.
Instacart denied it uses personal data to adjust prices.
Marty Bauer, ecommerce and retail expert at Omnisend, told FI that small discrepancies in pricing could be overlooked.
“Convenience is a powerful painkiller … [but] if the difference becomes obvious or starts stacking up, consumers will blame the platform, even if the pricing technically isn’t Instacart’s fault,” Bauer said. “And, once the customers feel the system is working against them – or manipulating them – they’ll simply switch to curbside pickup or reserve delivery for emergencies.”
Dynamic pricing already is a fact of life for airfare, Costco bulk discounts and Amazon price comparisons. The difference is that consumers are comfortable with bulk savings, price matching or subscription discounts.
“When they feel deceived or caught off guard, there will be backlash and that’s when the real damage is felt,” said Pascal Yammine, CEO at Zilliant. “The bottom line is that dynamic pricing is fully dependent on trust. If organizations are transparent about their use of dynamic pricing and consumers understand the reason behind pricing changes, they’re more likely to accept it.”
Food for Thought Leadership
This Episode is Sponsored by: Koelnmesse
Snacking in the U.S. has been on the rise for many years, but is this a global phenomenon? Sabine Schommer, Director, ISM, and Guido Hentschke, Director, ProSweets Cologne and ISM Ingredients, explore European and global snacking trends, and how the trio of ISM, ISM Ingredients, and ProSweets Cologne serve as a meeting place for the global snacking industry.
