If you are even remotely interested in gaming, or simply if you have children, you are likely aware of the major drama that has been unfolding since November 2020: the severe (and global) shortage of PlayStation 5 gaming consoles. If this is news to you, then let me give you the gist of it: the situation is so bad that some people have been trying to buy one for over a year, unsuccessfully. I personally experienced it once I started looking for my son’s Christmas present…in August.
Initially, the blame fell on the Covid-19 pandemic and the resulting global shortage of semi-conductors, obviously a key component of an electronic gaming console. But over time, another culprit emerged, ruthless, merciless and way too powerful for us mere humans: shopping bots.
Shopping Bots: Genesis
Shopping bots have been around for a few years now, paralleling the rise of ecommerce. To put it simply, they are a piece of software that automates some of the online shopping tasks, such as checking product availability and restock, putting an item in a cart and checking out. Of course, being robots, they can execute all these mundane tasks at a scale and speed that even the most avid online (human) shopper can only dream of.
On the face of it, this description makes shopping bots look harmless, if not helpful. After all, data scientists have been using such bots to perform web scraping tasks for over a decade, mostly to conduct competitive pricing intelligence, which, in theory at least, should benefit consumers by driving more transparency and more competition.
However, some of these shopping bots, called “scalpers”, have wreaked havoc on entire markets (PlayStation 5, sneakers, niche graphics cards, etc.). As the Open Web Application Security Project (OWASP) puts it, scalping bots acquire products “using the application in a manner that a normal user would be unable to undertake manually”.
Here is how it works: the scalping bot will target a given product, constantly checking for availability by refreshing the product’s page, then placing an order as soon as the product becomes available, usually in large quantities, buying up all the freshly available inventory before human shoppers even get a chance to press “Add to cart”. The products are then re-sold on the secondary market, at a large premium (typically 2x, sometimes even more) over the item’s original retail price.
This hurts consumers in two obvious ways: first, the items are unavailable for purchase, creating artificial scarcity. Second, it drives prices up significantly, as the chart below demonstrates in the case of the PlayStation 5 console. As you look at this chart, keep in mind that the vertical axis (% over MSRP) is for what is technically a “used” product, given that these consumers are buying it on the secondary market, not from the retailer.
Scalpers can be killed…by the right pricing strategy
If scalping bots primarily hurt consumers, they hurt retailers too. First, there is a rather negative impact on all the brands associated with that process. In the case of PlayStation 5, one only needs to spend a few minutes on social media to read countless of expletive-laden reviews about Sony and the major big box retailers carrying its products (e.g. Amazon, Walmart, Best Buy, etc.) That can become a major issue for these retailers, eventually driving traffic and sales down, especially if they are perceived as not doing enough (or worse, as being complicit) to try and neutralize the scalping bots.
However, there is a more fundamental issue for these retailers: scalping bots act the way they do because they have a financial incentive to do so. Namely, the MSRP is too low and there is a significant segment of consumers willing to pay more. This represents lost profits for the retailers, who are stuck selling at MSRP because of the competition between them.
As a side note, it is interesting to mention that, in the specific case of the PlayStation 5, Sony’s pricing strategy actually created this situation in the first place. Indeed, Sony is using a “razor and blades” pricing and sells the console itself at a loss to boost the sales of its more profitable products: the games, accessories and other digital products.
So, given that the MSRP is unlikely to change, what can retailers do? Well, they could borrow some pages from the live entertainment industry’s playbook. Ticket scalping has been an issue in that industry for decades and it responded by doing the following:
- Add value and bundle. Scalpers are adding an unnecessary step in the consumer’s buying process and can even lower the products’ value (by adding more shipping and storing, they increase the risk of damaged goods). Retailers can respond in kind by providing strong incentives to consumers to buy directly from them. It can be done either by bundling the item with other products (at an attractive price) or by offering services such as extended warranty or free installation.
- Move away from “first arrived, first served” by segmenting customers and offering memberships. Humans’ war against scalping bots is doomed to fail as long as orders are being processed on a “first arrived, first served” basis. However, retailers can ensure that their items are reaching “real” customers by making said items available only to pre-selected club members. Various membership tiers could even be developed to best serve customers based on their interests.
- Use auctions. This option would work well with truly limited-edition items, not necessarily with mass products (such as the PlayStation 5) in limited supply. Nonetheless, combined with the first two options, it could provide a viable (and profitable) way to serve the most ardent customers. Most importantly, it would allow retailers to recapture some of the profits currently going to the scalpers (and who are already, in a way, auctioning their products).
Shoppers of the World, unite … and go to a store near you
What about the poor consumers still looking to put a PlayStation 5 at MSRP under the tree this Christmas? Are they doomed to simply give way to the scalpers?
Rest assured, they don’t. In fact, the resistance has already started organizing itself and has found a very unlikely weapon against the scalping bots: the good old brick-and-mortar store. As it happens, scalping bots still haven’t found a way to walk into a store, ask (nicely) to the clerk and purchase the desired item. Better yet, there are now organized online groups of consumers sharing tips and locations of stores where the products might be available. In other words, to beat the bots, take your shopping offline.
It obviously does not solve the supply issue, even though it reveals that there are in fact a lot more quantities available that what the scalpers would have you believe. However, it does raise a very interesting question (and a significant opportunity) for the retail industry: are scalping bots going to revive brick-and-mortar stores and the appeal of “physical” shopping?
Happy Holidays!
