Growth in E-Commerce requires new ways to measure economic shifts
Online retail has been booming for years, far outstripping the growth of traditional retail. The impact of this shift—from media buying to mobile purchasing and showrooming—has been examined extensively
However, one major facet of online shopping growth that has remained largely unexplored is what it means to macroeconomic shifts in pricing and other key economic indicators. Increasingly, what is happening online is indicative, and predictive, of what is happening in the overall economy.
The Digital Price Index (DPI), part of a debut effort by Adobe (CMO.com’s parent company) to provide big data insights about the overall economy, aims to explore trends in online pricing and determine how these trends and prices track to more traditional measures of inflation. The effort, for which Adobe worked with two renowned economists, makes it clear that such data can be leveraged well beyond marketing.
Every three years, the Bureau of Labour Statistics (BLS) releases its Consumer Price Index (CPI), which measures changes in the price level of consumer goods and services purchased in stores by households. The BLS reaches out to Americans and asks them to recall what they buy, how often, and how much they spend.
“E-commerce, as well as quicker transactions and the ability to get products to market faster, has ballooned the number of new products,” said Tamara Gaffney, principal analyst at Adobe Digital Index. “The challenge for the BLS—and it’s not that they’re doing anything wrong—is that their techniques are not able to capture the digital marketplace, so they are not keeping up with the pace of change.”
For example, when it comes to electronics, which is increasingly a more important area of consumer spending, about 40 % of all spend in a given month goes to products that have been on the shelves for less than three months. If you extend this period to a year, 80 % of all spend goes to products that have been on the shelves for less than a year.
“Consumers are constantly shifting what they’re buying,” said Luiz Maykot, an analyst at ADI. “However, the CPI can only pick up that effect in a particular category every four years, when the BLS survey consumers and ask them what they buy.”
Seeing that it could complement the work of the BLS, better capture the dynamism of new product introduction, and harness the data from billions of online transactions, ADI set out to create the DPI. Greater precision around quantity sold and other data allows ADI to use what is considered the gold standard for pricing analysis, the Fisher Ideal Price Index.
In its first iteration, the DPI covers two categories of online spend—electronics and groceries, although the model will be expanded in future. The DPI reports that prices for electronics decreased 10.41% between January 2015 and January 2016. When breaking the statistics down more specifically to just computers, ADI finds a cumulative deflation of 13.07 % between January 2015 and January 2016. For the same period, the BLS reported cumulative deflation of 7.09 %. The reason for this, according Maykot, is that new PCs come out often, lowering the prices of older models, which consumers often buy.
ADI is also seeing strong deflation in televisions. Between January 2015 and January 2016, ADI shows cumulative deflation of 19.37 %. For the same period, the BLS reported cumulative deflation of 14.35 %. As with PCs, the TV marketplace is constantly releasing newer and more sophisticated TVs, automatically lowering the prices of older models.
ADI also looked at the price point trends for tablets, which is not covered in BLS’s CPI. According to ADI, prices for tablet devices decreased 21.08 % between January 2015 and January 2016. For February, prices decreased 3.279 % from January. Main price decreases are for Apple and Microsoft tablets. For January, prices are up 2.66 % over the previous month. The main price increases are for Apple tablets.
In its first iteration, the DPI also estimates inflation in a small but growing area of online spend: groceries. For groceries, specifically Food at Home, over the past year, ADI has seen an inflation rate of 0.602 %. That is different than what the BLS has seen for the same period: a deflation of negative 0.4 %.
“Consumers, more and more, are finding new products more quickly than ever because of digital resources,” Gaffney said. “They don’t have to wait until they get to their local store. This, of course, makes it harder and harder for retailers to keep up.”
Gaffney sees the DPI, and Adobe’s broader Digital Economy Project, as an example of how marketing data can go “way beyond marketing to provide insight that marketers and the entire business can use to anticipate where the market is going.”