Personalised pricing is the future of pricing models and it is all because of a cartoon:
Have you seen this internet meme before?
This is a version of the original cartoon by Craig Froehle. The image represents the equality versus equity debate at its ‘simplistic’ core.
But I’m not here to talk to you about egalitarianism. This meme also behaves as a visual metaphor for personalised pricing. The left-hand side shows a case where firms price goods and services equally, with no consideration of personal factors and everyone receives an overall unequitable resolution. On the right-hand side of the image, we pay according to our needs/demand, and the overall resolution is more optimal.
This is personalised pricing in a nutshell: firms taking the consumer’s personalised requirements into consideration before applying a price tag to a good or service.
There is an obvious flaw in what I’ve just mentioned above.
If personalised pricing is used by firms to gauge individual consumer demand for products, what is to stop them for raising prices for customers they believe will be willing to pay a higher price? This is also what concerned the Office of Fair Trading (OFT), resulting in a call for information regarding online personalised pricing in 2012.
However, other than potential regulation and fear of customer disenfranchisement (which should be incentive enough) there’s not much preventing firms from undertaking this strategy.
Therefore, perhaps a better description of the opportunity within personalised pricing, is personalised discounting.
Firms can use customer data in order to predict what the consumer is searching for and then provide the best deals based on their needs.
Take the example of Virgin Holidays in 2017, who announced a personalised pricing approach that reduced prices for single-parent families. While this is something that is far from revolutionary in the travel industry, it’s a pricing approach that seems to work well. In other industries such as retail, personalised pricing (despite it’s potentially equitable tagline) has been a rather sour spot for the consumer.
One of the biggest issues with personalised pricing is a lack of transparency and consumer understanding.
Personalised pricing is often used interchangeably with dynamic pricing. Dynamic pricing uses variables external from the customer to determine prices. Most firms that use data to fuel pricing models engage in this practice. For example, Uber with their surge feature that may impact customers during rush hour. Or when your favourite sports team are playing their local rivals, ticket prices are expected to be higher (thankfully watching Tottenham lose as an Arsenal fan is priceless).
The consumer collectively feels the impacts of dynamic pricing, with increases or decreases being ubiquitous. Conversely, personalised pricing is all about balancing how much you believe the cost of a product is worth to you and your circumstances. Many believe that this may help increase consumer purchase responsibility.
Are consumer concerns justified?
However, personalised pricing makes several assumptions that arise from traditional Economic theory, such as assuming the consumer is rational and is happy to be the subject of heterogenous pricing.
This is a dangerous assumption that nearly ended up costing Amazon dearly in the early 2000s.
New visitors to Amazon experienced lower prices than older customers. While Amazon maintain that this was a price testing process rather than price discrimination it is a clear example of how easily the customer can become disgruntled with pricing strategies. For the consumer the lines are usually blurred between personalised pricing and discriminatory pricing.
The Competition and Markets Authority (CMA) are concerned about the fact that firms will not behave in an equitable manner and may in fact (un)intentionally exploit customers.
So why is personalised pricing the future?
- The personalised pricing model approach, if used correctly, can help vulnerable customers receive more equitable deals and improved customer satisfaction.
- The consumer benefits from a shopping experience that is tailored to them.
- Personalised pricing is a closer representation of supply-demand curve of a product, this can help firms maximise revenue.
The above supply-demand curve diagram is one straight out of an A-level Economics textbook. It shows that the lower the price, the higher the quantity of a good/service demanded by the consumer will be (largely true for all markets with exceptions such as the luxury market).
The consumer surplus represents the amount a consumer would be willing to pay above the market rate. When firms allow customers to dictate the price through a personalised pricing approach, the level of supply is responsive to the amount a customer is willing to pay. This ensures that firms and consumers operate at an equilibrium state (where supply = demand).
In short, there is less efficiency wastage and by operating at equilibrium, markets tend to be more sustainable in the long term.
One firm that has been ahead of the proverbial curve in regard to personalised pricing is SavvyWatch. An accessories retailer that introduced a capability for customers to pay what they wanted for products. Customers would receive a notification informing them whether their offer was accepted. This pricing strategy allows customers to set prices based on their demand and market research, and not leave with the feeling that they have overpaid.
Personalised pricing, if used correctly, can be the future of pricing strategy across markets.
While this article largely portrays a positive picture (cartoon) of personalised pricing, it must be caveated by the fact that the consumer is still at the mercy of firms who will naturally be incentivised by profiteering. Some firms believe stale and outdated pricing strategies should be a thing of the past.
However, a note of caution is advised. Market regulators must remain hawk-eyed ensuring firms are not exploiting customers. If personalised pricing is to be successful, firms must find the correct balance between remaining ethical and being profitable.
Badar is an AI advisory consultant in the Insight Driven Enterprise practise.