Business

Japan firms fight the frugal retail psyche with AI-driven pricing and other tricks

by Kaori Kaneko

Reuters

After years of soggy inflation and a long reign by Japan’s tightfisted shoppers, businesses are adopting new methods to lift prices, from artificial intelligence to simple packaging tweaks.

Despite many rounds of stimulus, policymakers have failed to jolt households out of the deflationary mindset that followed the 1990s property crash, which meant businesses refused to raise prices for fear of losing customers.

Demand-based dynamic pricing, however, has allowed some Japanese retailers to discretely bump up prices without triggering the kind of customer backlash seen in more blatant attempts at repricing in the past.

The J. League soccer team Yokohama F. Marinos, for example, introduced artificial intelligence last year to more closely align ticket prices with demand.

“Previously, it was difficult to find the best prices between demand and value of each match,” said Hiroshi Nagai, the club’s general manager for fan relations. “The most fascinating thing about dynamic pricing is that it can offer more choices to customers.”

Dynamic pricing, or surge pricing, is common among data-driven businesses such as ride-hailing services but is a relatively new concept for most traditional Japanese firms.

Using the technology, the Marinos sold tickets for a popular seating area for a March 2 match at ¥7,400 two weeks before the game but cut prices to as low as ¥4,000 to fill empty seats as the match approached.

Koji Kawashimo, a 34-year-old Marinos fan, said he had no problem with his team adopting dynamic pricing.

“I will pay for what I like,” he said. “I want to pay if it’s worth it.”

Hotels are also introducing dynamic pricing for their room rates, including Centurion International, which operates more than 20 hotels in Japan.

Centurion began using AI to collect information to charge higher prices when demand is strong and offer discounts when demand falls to reduce vacancies.

“The system provides us information on competitors such as the pace of reservation, which is great. It’s a big advantage,” said Hironobu Bun, revenue manager at Centurion International.

Economists believe it will take more meaningful structural changes to Japan’s economy to revive stagnant prices, which will in turn help businesses deal with sticky overheads and restore profits.

However, developments like the adoption of dynamic pricing can lay the groundwork for more radical changes in how companies set prices for their goods and services.

“If dynamic pricing can change people’s mindset so that they believe prices can fluctuate more, there’s a chance firms may be able to raise prices more easily where demand is strong,” said Izuru Kato, chief economist at Totan Research.

At the same time, other businesses are looking at more cosmetic ways to get consumers to accept higher prices.

Japan’s gyūdon (beef on rice) bowls have become a symbol of deflation due to their aggressively low prices. But some restaurant chains are turning that trope around by offering “premium bowls” with better-quality meat for more than double the standard price.

The 500,000 sukiyaki bowls offered by fast-food chain Yoshinoya Holdings Co. in August were sold out in about two weeks — much faster than the company had expected — despite a price tag of ¥860 per bowl, double that of a standard dish.

“The customer response has been good. If they see value in it, they would pay even if the price is a little higher,” said company spokesman Yuji Terasawa.

While such tactics seem to provide a payoff, they take careful planning and preparation. Fast Retailing Co. Ltd., whose budget clothing chain Uniqlo boomed during Japan’s deflation era, learned that the hard way when sales slumped after it raised prices in 2014.

In contrast, discount barber chain QB House earlier this year raised prices for a 10-minute haircut to ¥1,200 from ¥1,080, explaining it was needed to increase salaries to secure better-trained barbers.

That move followed eight years of checking the customer mood through regular marketing surveys.

While the hike triggered a 2 percent decline in customers from the previous year, the drop was much smaller than the company’s projection of 6 percent.

“The price of a haircut is still lower than other places,” said Kazuaki Mimura, a 34-year-old employee of a service-sector firm. “I’m willing to accept a hike of a few hundred yen because the service here is quick and my haircut is done properly.”