Will personalized pricing end retailers’ use of dynamic pricing?

Discussion
Mar 30, 2017
Nikki Baird

Through a special arrangement, presented here for discussion is a summary of an article from Retail Paradox, Retail Systems Research’s weekly analysis on emerging issues facing retailers.

While sometimes used interchangeably, dynamic and personalized pricing are not the same thing.

In dynamic pricing, the price generally changes according to variables specifically not customer-related. Prices might be altered based on time of day, available supply, competitors’ prices, or maybe, just maybe, the volume of traffic to a product detail page. The price may change, but everyone will see that price no matter who they are, so long as they are on the product detail page at the same time.

With personalized pricing, it’s entirely about who the customer is. There is the price on the page or on the shelf, and then there is “your” price — the unique offer you received.

Personalized pricing does not mean you need to know everything there is about a customer. If an unknown shopper comes back to a shopping cart item five times but hasn’t purchased, an offer to knock 10-percent off the price — just for that shopper that one time — may net a purchase that might otherwise have been lost.

In the same way, if the shopper is known, a low-value shopper who hasn’t demonstrated much loyalty may not receive that little extra incentive, whereas a high-value, loyal shopper just might.

Retailers, it appears, have decided that dynamic pricing is on the out. In our newest benchmark report on pricing, 22 percent of respondents saw dynamic pricing as an opportunity in 2017, down from 28 percent in 2016. The opportunity inherent in personalized offers crept up from 31 percent in 2016 to 33 percent in 2017.

Yet if dynamic pricing is out, why didn’t personalized receive a greater uptick? Retailers fear consumers’ reactions. Consumers noticing just how much retailers know about them may decide — whether they get better offers or not — that they don’t like it.

So, while retailers may be seeing opportunities to develop more personalized prices, they also have to be careful and take a slow and steady approach to introducing personalized offers.

Dynamic vs. Personalized Pricing – RSR Research

DISCUSSION QUESTIONS: Do you see a bigger potential benefit for retailers using personalized pricing versus dynamic pricing? Do you see a backlash coming from consumers over personalized pricing or dynamic pricing?

Braintrust
"There are pluses and minuses for both approaches!"
"Personalized pricing is a long way from reality or commonality in retail. Mark is right — the challenge and potential legal problems are huge."
"How much margin is really at stake here, for what risk, and what is the probability of pulling this one off?"

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16 Comments on "Will personalized pricing end retailers’ use of dynamic pricing?"


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Mark Ryski
BrainTrust

Notwithstanding the challenges of implementation — which are considerable — personalized pricing does have advantages. Every customer is different and represents a unique value to the retailer. Having the ability to adjust pricing to reflect this inherent value makes good sense. While there is a potential for some negative consumer reaction, the fact is that other industries, like airlines for example, have been successfully using personalized pricing for years. The key challenge for retailers to personalize pricing is that many do not have enough or any information on their customers, and so the application of personalized pricing may be limited.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Personalized pricing is a manifestation of the science of the possible. It can be seen as a trophy for both the seller and the customer. The retailer wins the purchase and the customer really does feel special. I have six sisters-in-law, each one of which, when I compliment them on their garment, immediately declares where they bought it and what they paid. It is their trophy. When everyone wins, and since the best of commerce is relationship-based, personalized pricing reflects the nature of each unique relationship. Personalized pricing is one of those technology-enabled situations in which just because we can, we should.

Bob Amster
BrainTrust

Personalized pricing can potentially start a rebellion among consumers. When consumers start talking to each other about what they paid for the same product at the same outlet and find significant (or any) differences, there could be an uproar. It is as unsavory as finding out that the person sitting next to you on an airplane paid less than half of what you paid for the seat, although that is called dynamic pricing.

Max Goldberg
BrainTrust

Both dynamic and personalized pricing offer risks and rewards to retailers. Consumers dislike both. Dynamic because they may pay more than someone else. Personalized because it violates their sense of privacy. Retailers need to be careful, lest they offend the buyers that they covet.

Cathy Hotka
BrainTrust

Personalized pricing is the future. There’s a new company, about to launch in retail with deep roots in the casino industry. Using them, retailers won’t have to give away margin by reducing prices for everyone, and can treat the very best customers differently. One-size-fits-all leaves money on the table.

Ricardo Belmar
BrainTrust

Retailers like dynamic or personalized pricing for different reasons. Their feelings also vary based on the merchandise offered. Consumers tend to favor personalized pricing the more expensive and luxury-oriented the product. Retailers want to find ways to reward loyal customers while still maintaining a healthy margin. Personalized pricing can do this. Dynamic pricing on the other hand is useful for retailers selling volatile products affected by external conditions such as supply. For example, retailers selling winter snow removal equipment may want to alter pricing for snow blowers when there is an impending storm coming. There are pluses and minuses for both approaches!

Peter Charness
BrainTrust

I’m always a bit amazed at how many retailers tackle some of these really hard problems when there are plenty of higher-priority ones out there. With all the doom and gloom and looming bankruptcies out there, getting profitable about omnichannel, filling stores with compelling product sets, advancing the brand and keeping Amazon from chewing up your market share. I don’t recall hearing Sports Authority, Macy’s, Bebe or Wet Seal say, if only we’d had personal pricing we might have escaped from death’s doorstep. How much margin is really at stake here, for what risk, and what is the probability of pulling this one off?

Naomi K. Shapiro
BrainTrust

This timely answer from Shai Geva, co-founder and CTO at Upstream Commerce Retail Intelligence Company:
“There is room for both dynamic and personalized pricing. Both can help retailers improve their bottom line. In fact, there are already verticals where if you are not deploying some price optimization solution, you’re being left behind.

“If anything, dynamic pricing is easier to implement, and less annoying to shoppers. The dissatisfaction may be due to failure of solutions to deliver on their promises — choose a solution that delivers.”

Tom Redd
Guest

Personalized pricing is a long way from reality or commonality in retail. Mark is right — the challenge and potential legal problems are huge. Personalized on price is different than real relationships that retailers can help associates learn to develop with shoppers and it goes beyond just the price issue.

I have a guitar shop that runs a great online shop and after one order — not a huge one — a guy called and asked if all was OK with the order. He has called every two months of the past four years. We have a good relationship and it has nothing to do with pricing technology. I just bought some pricey guitar stuff and went to their website … No personal price stuff involved. Relationships are of more value in this retail world than pricing.

Lee Kent
BrainTrust

Ah, the pricing game. One size never fits all but once we learn the game, we usually jump in and play for the best price. If you got a better price than me I am going to ask you how and, If it’s worth it to me, I’ll do likewise.

That’s my 2 cents anyway.

Ralph Jacobson
BrainTrust

I remember more than a decade ago when Electronic Shelf Labels (ELS) gained the capability of Near Field Communication (NFC) so a shopper could touch their frequent shopper key fob to the ESL and the price would drop according to the individual shopper’s buying history. There was a big fear of the retailers concerning the sentiment of shoppers who may be offended by this personalized pricing. The fears never materialized because the ESL technology has yet to be widely adopted.

In this case of dynamic vs. personalized pricing, I’d say that apprehension may still exist, however, the advantages outweigh any potential negative sentiment, that, by the way, can be managed effectively with appropriate marketing messaging.

Gordon Grant
Guest
I don’t believe that one necessarily rules out the other. I think that there are specific use cases that can play to each of the options. Dynamic Pricing: A 24hr pharmacy or convenience store may increase all of their prices by x% between 22:00 and 08:00. Personalised Pricing: A customer in a grocery store may be using something like FutureProofRetail’s mobile checkout app. They add Product X to their basket and then Product Y. The app knows enough about them and offers them a discount if they add Product Z too. People seem to be getting excited about personalised pricing, but that’s exactly what we’ve had for years via loyalty coupons. Sure, the technology means that the decision making is more complex nowadays, but multiple people have been standing in the queue at the grocery store for years with the same product and been paying different prices due to coupons. I think that intelligent use of both pricing options can be a win-win for retailers and customers. As with many things, it’s poor execution that… Read more »
Craig Sundstrom
Guest

I’m going to go out on a limb here, and mustering all my legal knowledge — which admittedly can be fitted into a small cup (bigger than a teacup but smaller than a stein) — argue that personalized pricing is illegal, at least if it includes variables like age, gender, race, etc. (i.e. things over which people have no control); and I don’t see how it can’t, ultimately, even if the inclusion is inadvertent.

Beyond that, it’s largely a question of practically. Individual pricing means a separate demand curve for everyone, and is the ultimate weapon for wringing out every possible cent of profit. But since it can only be effected by computerized programs, it puts a huge portion of a firm’s pricing strategy out of the control of humans.

Shep Hyken
BrainTrust

There is room for both dynamic and personalized pricing. Supply and demand, along with several other factors can help influence dynamic pricing. However, the “personalized experience” can now include pricing. Taking care of loyal customers is powerful. The risk is when there are price discrepancies when customers share with each other what they paid. Perhaps a discount to the frequent shopper might be more appropriate than changing prices between individual shoppers. Or state the retail price with a message something like: Because of your loyalty, we are reducing the price just for you to $___. At least then the customers knows they are being appreciated for their loyalty to the retailer. So, perhaps the more appropriate term is “Dynamic Discounting.”

Tom Erskine
BrainTrust
9 months 18 days ago

If I attempt to buy ice cream and the store charges me a $2 premium because its hot out (dynamic pricing), I consider it gouging. If they offer me $2 off because I’m a loyal customer, and an additional $1 off because I have 3 kids (personalized) then I love it!

“Personalized offers” that include a standard price, plus some type of discount tailored to the individual and the context of the situation are already used with incredible results in many industries (Telco, Financial Services, Travel/Hospitality) and retail needs to get with the times! For an example of context, consider the difference in a consumer’s willingness to pay for a flatscreen TV in an impulse situation vs. one where the consumer has visited the website 10 times to heavily research choices. That’s worth many points of margin alone.

Edris Bemanian
Guest
9 months 12 days ago

The use cases that Nikki referenced to describe personalized pricing vs. dynamic pricing are fantastic examples. One thing we should keep in mind is that there are various levels of dynamic pricing and personalized pricing.

I believe that becoming MORE dynamic in your pricing CAN generate returns if executed in a thoughtful manner. I also have seen data that clearly shows how becoming more personalized in your pricing can drive significant ROI as well.

My only comment is that this shouldn’t be a binary decision. It would be prescient for us to all take a look at where we are on our pricing journey as it relates to being dynamic (responsive to the market, responsive to customers on a whole) and where we are on our personalized journey (determining who and what to discount and who not to) and explore what it would mean to move a step or two in each direction.

It doesn’t always have to be a binary decision.

wpDiscuz
Braintrust
"There are pluses and minuses for both approaches!"
"Personalized pricing is a long way from reality or commonality in retail. Mark is right — the challenge and potential legal problems are huge."
"How much margin is really at stake here, for what risk, and what is the probability of pulling this one off?"

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