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Retailers Might Be Shooting Themselves in the Foot with Personalized Pricing

Ellen Harvey

Personalization has come to dominate the world of online retail. Whether retailers are delivering more targeted marketing messages or providing custom product recommendations, personalization has permeated every stage of the customer journey. Some retailers are even experimenting with personalized pricing, a popular tactic among travel booking sites, which involves providing different product prices to different users, based on data like location, browser, and past shopping behavior.

Rafi MohammedWhile this may seem like an effective way to ensure maximum profits from consumers, Rafi Mohammed cautions retailers against this approach. Pricing strategy consultant and author of “The Art of Pricing: How to Find the Hidden Profits to Grow Your Business and The 1% Windfall: How Successful Companies Use Price to Profit and Grow,” Rafi has found retailers run the risk of damaging their brands by offering different prices for the same products.

“Amazon was caught doing this in the early 2000s,” explains Rafi. “It offered different prices to different customers based on their user data. It was well documented, and it caused an uproar. Amazon did eventually say, ‘We will never do this again.’ It’s unfortunate that retailers are making this same mistake.”

In a recent conversation on the Sidecar podcast, Rafi explained that a better way to serve price sensitive shoppers is offering a “Good, Better, Best” model which provides different tiers of product quality. The “Good” offering is the least expensive and helps retailers convert the most price sensitive shoppers, while the “Best,” which is typically of a higher quality, entices less price sensitive shoppers to spend more with a retailer. According to Rafi, “Best” products can drive as much as 40% to 60% of retailers’ revenue.

Listen to the full podcast or read the top sound bites from the interview below.

Top Sound Bites

(edited for clarity and brevity)

What piqued your interest in personalized pricing?

Rafi Mohammed: I’m always interested in new types of pricing strategies. That’s what I do for a living. I think what was interesting about this is that I was planning a vacation and I was excited. I was doing all of this research on my laptop. I decided where to go, and I had the price and everything on Orbitz, but I didn’t purchase right away.

Then right before I went to bed, I thought, “Oh, I’ll check the price one more time.” I noticed that there was a difference in price when I accessed it by the mobile app as opposed to the web site on my laptop. I was getting a different price depending on the device and browser I used. That’s what led me to research personalized pricing more, and it became very interesting to me.

How are retailers or travel sites determining the personalized pricing?

RM: They are looking at things such as how many times have you been to the site, what zip code you’re coming from, what products you are looking at, what other products you’ve looked at in your history. They are sort of acting like a salesperson sizing you up when you’re buying a car. They’re asking questions like, “Oh, where are you from? What kind of car do you drive? What other cars are you looking at?” And for personalized pricing on the internet, retailers are asking customers those types of questions so that they can arrive at a final price that they think customers are willing to pay.

It almost seems like this is discriminatory because people are being treated differently for something as arbitrary as a zip code or browser.

RM: That’s a great point. This moves into the ethics of pricing, which is a fascinating topic in itself. At the end of the day, if I were the CEO of a company and I found that my personalized pricing was disproportionately affecting a certain ethnic group or gender, it would bother me.

There are a handful of economics papers where they tried to measure if different types of customers get different prices at car dealerships. And one study found that African-American women were consistently offered a much higher price than white males. And one could argue this is capitalism, and he or she who fights for the best price gets it. But the other part is that if I were the CEO of a company, that would be a troubling statistic to me.

Instead of personalized pricing, what should retailers do to attract the different types of shoppers that are out there, whether they are more price sensitive or less price sensitive?

RM: Going back to Economics 101 with the downward sloping demand curve, different customers are willing to pay different prices for your products. And what you’re trying to do is really create a pricing strategy that captures different profits from different types of customers. So certainly, personalized pricing is one way to do it. But I actually have an article in the September/October magazine edition of the “Harvard Business Review” on “Good, Better, Best.”

The notion of retailers offering good, better, and best products really allows customers to self-select what works best for them. So let’s say you have a product in the market, I would call that better. There’s always room, I found, to offer a best product. Because some customers are not price sensitive. They will say, “I want best. And if you can give me best, I will pay.” And it’s often shocking what percentage of customers will pay more for a higher quality product.

I’ve spoken to a number of retailers who have implemented “Good, Better, Best.” And what I found in this model is that 10% to 20% of your revenue comes from “Good”. This is revenue that you would otherwise wouldn’t have gotten. You are getting price sensitive people in the door. 25% to 50% of your revenue comes from better. But here is the shocking part, 40% to 60% comes from offering best.

You can certainly do personalized pricing, but offering customers “Good, Better, Best,” and allowing them to choose which one will make the most sense for them is really a more consumer-friendly way of reaping different profits from different customers.

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