What is Personalized Pricing and Should you Use It?

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. 

Sarah Cooper

You may also like
Revisiting Personas: Why they matter in the age of personalization
Blog

Revisiting Personas: Why they matter in the age of personalization

“Persona” is in “personalization.” That's obvious (and cheesy) I know, but most of us know by now that personas are...
Read More
Personally Identifiable Information (PII) 101
Blog

Personally Identifiable Information (PII) 101

Personally identifiable information, or PII, is self-explanatory and it’s nothing new. It hails from the age of mail-order catalogues and...
Read More
The rise of micro-moment: tiny moments, BIG impact
Blog

The rise of micro-moment: tiny moments, BIG impact

“Be quick, be there, be present.” That’s from Google, when they first coined “micro moments” in 2015. With the age...
Read More
Personalized marketing is omnichannel marketing
Blog

Personalized marketing is omnichannel marketing

Personalized marketing is omnichannel marketing. After all, your marketing strategy is not personalized at all if your customers have to...
Read More
The shift toward guarding customer data will boost influencer marketing
Blog

The shift toward guarding customer data will boost influencer marketing

The Cambridge Analytica scandal still makes people paranoid about Facebook, but marketers weren’t really surprised about it. We know how...
Read More
New tech makes account based marketing more achievable
Blog

New tech makes account based marketing more achievable

The marketing landscape is shifting in this new decade, thanks to marketers finally implementing martech (including AI) to adapt to customer demands and expectations. The same agility and intelligence we can utilize for hyper-personalization can be applied to account based marketing.
Read More
Customer Data 101—How to Collect and Use It in Lawful and Good Ways
Blog

Customer Data 101—How to Collect and Use It in Lawful and Good Ways

It’s projected that 2020 is the year marketers will finally stop being so scared that personalization is invasive, by making personalization impressive.
Read More
The marketing trend of the decade: insight-driven and customer-focused
Blog

The marketing trend of the decade: insight-driven and customer-focused

It’s hard or near impossible to plan for the future, especially with constant changes and updates to marketing innovation, but marketing leaders are always a good sounding board on giving insight and even predicting what would catch on sooner or later.
Read More
Is CRM finally ripe for disruption in 2020?
Blog

Is CRM finally ripe for disruption in 2020?

CRM can and should serve marketers on the challenge of attracting new prospects and keeping existing customers. The answer to that challenge is staying relevant and in step with customer preferences and expectations. 
Read More
Only relevant content is visible to your audience
Blog

Only relevant content is visible to your audience

Only relevant content is visible to your audience. We always talk about content marketing to attract audiences but it’s amazing how many businesses actually lose sight of the audience.
Read More
Align martech solutions with your marketing and engagement goals
Blog

Align martech solutions with your marketing and engagement goals

It’s going to be a long while before AI truly takes over from humans, if it ever will. The companies that use AI most effectively will be those that work with it, and allow it to take over processes that can and should be automated, freeing up employees to be more creative than ever, to connect dots they wouldn’t otherwise, and to be great translators of data.
Read More
The magic of dynamic content personalization
Blog

The magic of dynamic content personalization

Dynamic content and personalization together create a spark that can be super effective in firing up your marketing and sales goals.
Read More
The biggest lesson you need in business: product market fit
Blog

The biggest lesson you need in business: product market fit

Are people dying to get their hands on your service or product? How much is the demand for your product, and to what extent would you satisfy that demand?
Read More
Hyper-personalization: The fine line between impressive and invasive
Blog

Hyper-personalization: The fine line between impressive and invasive

People now expect hyper-personalization, but don’t want their privacy invaded. This is the privacy paradox.
Read More
The Future is Now—AI-generated content is here to stay
Blog Uncategorized

The Future is Now—AI-generated content is here to stay

Marketing standards and trends in 2016 or 2017 are no longer the done thing in 2019, and more changes will...
Read More
You have data tools, but do you have a data culture?
Blog

You have data tools, but do you have a data culture?

Data analytics tools are great and they’re getting better every year. Marketing continues to utilize and develop personalization through data-driven...
Read More
Artificial Intelligence Will Eliminate Jobs – and Create Them
Blog

Artificial Intelligence Will Eliminate Jobs – and Create Them

There’s a lot of fear around AI’s threat to disrupt a wide swath of jobs, and there seem to be a lot of good reasons why this will be the case. But there’s also no need to panic. Just as the Industrial Revolution disrupted countless jobs, a significant amount were also created.
Read More
How to Execute a Personalization Strategy
Blog

How to Execute a Personalization Strategy

There’s no official guidebook or roadmap for kicking off a personalization strategy at scale. Every organization is different, with varying...
Read More
What Does Artificial Intelligence Mean For Loyalty Marketing?
Blog

What Does Artificial Intelligence Mean For Loyalty Marketing?

Without hyperbole, the magic of artificial intelligence in marketing is its pattern recognition. And this ability to analyze and unpack behavior patterns empowers your loyalty marketing, which is by itself, already magic too.
Read More
Personalizing The Customer Experience In The Physical & Digital Worlds
Blog

Personalizing The Customer Experience In The Physical & Digital Worlds

The old version of demographic personalization “group-ized” rather than truly “personalized,” lumping people together and sending generalized content to each...
Read More
Previous Post
Next Post

LEAVE A REPLY