Personalized pricing seems like it’s the soulmate of personalized marketing. What are the benefits and downsides? Is this something you should implement in marketing and sales strategies?
Personalized pricing and dynamic pricing
Personalized pricing stands on foundational economics: consumer demand for a certain product rises when the price of that product falls. It’s rational. Everyone wants “more bang for your buck.”
That bang just differs for each customer. For example, a top-quality moisturizer in a bigger tub that lasts for months is enough “bang” for certain customers. A segment of customers doesn’t buy it, figuratively and literally. The store offers 20% off: some of them buy. The store offers 50% off: the sales skyrocket.
Online stores have an advantage in the ability to track customer behavior so that each customer is charged the price they’re willing to pay. They get big profits from the customers who see value in the product, not the price. On the other hand, discounted prices offered to customers who want price value also provide more sales, and therefore additional revenue.
This isn’t new. Airlines are famous for their price differentiation. And until Airbnb and Trivago came along, hotels did the same to their rooms. It’s called dynamic pricing.
Dynamic pricing is just as its name suggests, but the variables that cause the price changes are outside customer behavior, like competitor events, supply and demand, and even something like the current weather. If it’s pouring cats and dogs and you stop at a little motel that isn’t a chain with set prices, you can bet dynamic pricing will be employed.
Why it can work
Until 1861, product prices were between the vendor and the buyer. Everyone haggled. People might earn coins from aristocracy and gentry but accepted barter from common folk. And then a religious American merchant John Wanamaker invented price tags, so that we were also equal before price.
But standard pricing doesn’t always work. It leaves some customers unable or unwilling to pay.
Personalized pricing gives customers “a good deal,” they love it, and vendors profit more.
The price is right
Today’s technology in tracking and predicting customer behavior also makes personalized pricing accessible for retail. It’s a fact that some customers can and are willing to pay more while others need the discounts to enjoy a company’s products. Stores can implement strategy and use data to charge the exact price every customer is willing to pay.
The results are bigger profits and a customized shopper experience, which means customer approval and customer loyalty.
The profit projection
Netflix doesn’t use personalized pricing but it does deliver highly personalized experiences. You and your friend won’t see the same posters of the same movie if you like romance and your friend likes political intrigue.
Brandeis economist Benjamin Shiller made a model that predicted 14.6% more profits for Netflix if it used the following data, some of which Netflix probably already has:
- People’s web-browsing history
- The percentage of web use on Tuesdays
- The number of visits to RottenTomatoes.com
- And 5,000 other variables
This is in contrast to the mere 0.3% profit using demographics (race, income, zip code, etc.) to personalize prices.
What you risk
Demographics is what people suspect Amazon used in their infamous “price test” debacle in 2000, when people noticed Amazon was charging different prices for the same DVDs.
Personalized pricing is also called price discrimination for a reason. The backlash on Amazon was immediate, and to this day, Amazon steers clear of personalized pricing, and doesn’t allow its sellers to attempt it by not giving them access to customer data.
But retailers with their own websites can. In experiments by Catalonia researchers on whether websites do employ price discrimination, they found:
- Different products shown to the “affluent” and “budget-conscious:” the average price of the headphones shown to the affluent segment were four times higher than those shown to the budget-conscious.
- Direct price discrimination by demographic, with lower price points on the same product shown to addresses in Greater Boston and higher prices to those in more remote parts of Massachusetts.
Customer trust erosion
When customers catch your price changes in their browsing or in their shopping carts (this happens!), it results in severe mistrust.
Dynamic pricing is largely automated, but when your customer suddenly sees a higher price before checkout said customer will not always proceed to checkout — and just might leave you an irate review…everywhere.
No one likes being a loser. Consumers won’t like that other shoppers get better deals that weren’t offered to them.
Profit loss/expense of setup
If your dynamic pricing is based on price matching, you have no control over your competitors’ pricing. They might raise it before your customer’s checkout — and you’re stuck.
Setting up and monitoring dynamic and personalized pricing policies can be difficult. It needs an investment of time and manpower, including having the right developers and tools to gather/interpret data and implement the changes real-time in your system, and training your support staff about pricing so they’re not rejecting it or are surprised by it (this also happens).
You need rationale for your personalized pricing
Another name for personalized pricing is differentiated pricing. Discriminatory pricing is a no-no. Differentiated pricing means you have a legal/ethical rationale on how and why you set different prices for different customers.
Every business is unique. What doesn’t work for Amazon might work for you. Personalized pricing has many benefits for you and your customer base. But before introducing differentiated price points to your shoppers, you have to account for every detail and be able to effectively rationalize your personalized pricing to your customers.