Will personalized pricing only lead to more discounting?
A study from Baylor University concludes the mere presence of a personalized pricing program may encourage some consumers to expect discounts all the time.
The study, published in the Journal of Consumer Behavior, defined personalized pricing, or customized pricing, as “basing prices on individual consumers’ unique purchase patterns, rather than more typical bases for changing prices, including known customer group, time and retailer differences.”
Based on a survey of more than 700 adults, the study looked specifically at how consumers’ “interpersonal attachment styles” impact their responses to customized pricing.
Two interpersonal attachment styles were identified:
- Securely-attached individuals: People who expect others will be available and supportive when needed.
- Anxiously-attached individuals: People with less positive expectations about interpersonal-related situations and constantly worry about relationships.
Securely-attached individuals tend to be older and have higher incomes versus anxiously-attached ones. In both styles, the notion of individualized pricing was viewed positively, according to the study’s findings.
For securely-attached individuals, however, personalized pricing may create the expectation of always receiving discounted prices and cause a large portion of these consumers to feel dissatisfied at paying shelf price. Said Meredith David, Ph.D., assistant professor of marketing in Baylor’s Hankamer School of Business, in a statement, “They like it, but they expect it every time they go to the store. If they visit and don’t receive a specialized discount, it becomes an unmet expectation and they’re disappointed.”
Anxiously-attached individuals, by comparison, “get excited about the attention” because they don’t expect it.” They were also “generally OK” with paying the shelf price or receiving the same discounts as other shoppers.
While stating personalizing pricing programs “could be costly” for marketers, the authors did not conclude they were ineffective. The research aims to provide a “deeper understanding of which market segments may be more or less receptive to customized offerings” and assist in developing campaigns.
“Given the global shift toward a more ‘social’ and interconnected world, we believe that attachment theory will continue to emerge as a useful theory underlying many consumer behavior phenomena,” researchers wrote.
Discussion Questions
DISCUSSION QUESTIONS: Will personalized pricing lead shoppers to expect an individualized discount all or most of the time? Do you see more limited and targeted or broader applications for personalizing pricing programs?
Poll
BrainTrust
Shawn Harris
Board Advisor, Light Line Delivery
Anne Howe
Principal, Anne Howe Associates
Pricing should certainly be part of a personalization strategy, but if it is the only (or even the primary) element of the strategy then discount expectations will certainly come along for the ride. A well-rounded personalization strategy must also include content, offers, events and recommendations that reflect each shopper’s unique history with the brand across digital, social, physical and service channels. If we simply personalize prices, we are indeed training shoppers to expect discounts.
Personalized pricing has the potential for retailers to alienate consumers and build distrust. Not only will consumers expect discounts, they will be upset if they do not get a price they want. It’s better to periodically offer some promotional discounts to individual customers rather than trying to implement an ongoing personalized pricing plan.
Personalized pricing should be a part of a broader approach of personalization that retailers offer to customers. By analyzing their past purchases and understanding their “customer DNA” we can understand who are the more price sensitive customers, who are the coupon/discount addicts and who are not.
We can then create our strategy about what to communicate and to whom. Obviously the customer segments of “discount addicts” should be treated differently and if we include them in personalized pricing communication, they will expect it all the time and we may lose them as customers if they don’t get it. However, other segments may react differently and for them personalized pricing can be a good tactic that may increase the retailer’s “wallet share” without creating expectations that cannot be met without sacrificing too much margin.
To a degree, I think these pricing gadgets are technology that CAN be built looking for a reason to exist. The creators have found that reason by adopting the theory that for all consumers it’s all about price.
They are wrong. Only a segment of customers are highly price-sensitive. Yet these price strategies go out of their way to train those who aren’t price sensitive to become price sensitive.
There is no way for a dash to the pricing bottom to end well. We should note that many of the best brands work hard to maintain price consistency across channels — and win as a result.
I see this as an excellent concept with a long-term bad result. There have always been “buying” clubs and retailers who have programs that if you pay “X” dollars a year, you get “X” percent off all purchases so, of course, the consumer is going to expect the discount every time. And to compensate, other consumers will feel they’re paying more for the product to make up for someone else’s discount. I think personalized pricing may have some promotional value if used for “special” events but, just like the retailer that has had too many sales which now realizes it needs to have one every day because the customer won’t pay full price, I see the same problem with personalized pricing.
I believe it will be all about the implementation of the personalized pricing program; it should be part of a broader, clearly-defined personalization strategy. It shouldn’t be generally available to every shopper and preferably should be a part of a known shopper loyalty program. If a retailer has the data to prescribe an individual customer’s willingness to pay for a given product, then they would logically make more money on that product as they are finding the optimal maximum product price per shopper rather than using the single price model for all. I think the tough part will be to implement it in an unbiased way, so shoppers are not left feeling slighted.
If it became apparent to me that I paid more or a premium just because I didn’t walk into a store at the right time of day or I didn’t download and monitor an app, I would definitely not support that retailer anymore. While I know this tactic happens all the time with airline tickets and hotel rooms, I reject this practice in a retail store environment.
Interestingly, different surveys yield different insights. One such survey says that personalization has not been very successful — just about 8 percent of customers say personalization fosters loyalty. In our retail pricing audit, seven out of 10 SKUs were priced incorrectly mostly because the model used for personalized pricing was making many incorrect assumptions. Personalized pricing only works when the retailer has enough information or loyalty from the customer (not all customers are frequent shoppers).
Most retail pricing models currently in practice require a new method of price optimization. So even if they discount the product, they are going to hurt their bottom-line or under- or over-price their customers.
The benefit to real-time personalization of the shopping experience, not just personalized pricing, is that the merchant can target specific audiences to offer the promotions that make the most sense. This can include discount pricing, or it can include higher pricing than other demographics yet still offer compelling promotions that may not erode margin. The key is to elevate the promotional campaign to the overall experience so you’re not locked into simply giving mass discounts to everyone. There are some great tools today that retailers are leveraging successfully to do this.
Risk and complexity with difficult-to-prove results. It certainly has possibilities, but I really wonder if this is the best investment available to retailers today.
I think it’s less about an expectation of discounts and more about breaking the antiquated notion of MSRP. Why should producers set prices months or years in advance when in actuality the act of making and distributing a product often has unpredictable and variable costs? Having dynamic pricing, whether in response to market conditions, cost of goods or consumers willingness to pay given history or capability, simply makes much more sense.
If all shoppers ever get from personalization efforts is a discount, shame on all of us in the retail and marketing disciplines. Consumers, believe it or not, still not only want but respond to other messaging on topics besides price — that can include the brand story, the value and/or the meaning and benefits of products. If we never serve them messaging like this, we’ll continue the race to the bottom!
Personalized pricing, if properly executed, will not lead to more discounting overall for retailers. The key is to target discounts based on prior shopping habits of known customers. For example, if Jane always pays full price, you don’t need to offer her discounts or just minimal discounts and if Olivia only buys items at a discounted price then you will offer her more discounts.
It is all about understanding each individual’s price elasticity and pricing/discounting accordingly.
Personalization is not simply related to pricing, rather it’s a complementary component of a customized shopping experience. The modern day digital/physical/mobile personalized shopping journey includes a far greater emphasis on experiences first, limited-time offers, exclusivity, seamless integrations with social channels and, most importantly, a robust loyalty program that knows, understands and can cultivate a relationship between a retail brand and a consumer.
Amazon’s discount pricing strategy via their Prime membership comes at a premium. However, it creates and retains a significant brand loyalty that enables Amazon to remain the focal point for customers’ diverse shopping needs. The value of this relationship is not only the shipping, but the exclusivity a customer feels as an Amazon Prime member with the discounted members-only pricing. Membership has its privileges for the consumer and Amazon has a consistent revenue stream with premium Prime offerings. This could possibly work for other retailers as well.
Personalized or customized pricing is a manifestation of what technology enables companies to do in pricing their goods and services at the individual customer level. While the practice may be questioned on ethical grounds, it does not run afoul of the law unless it is shown to be part of pricing collusion among competitors. Yet when consumers in studies are told how their personalized price was set and that different prices were charged for the same product, a majority see it as unfair.
Going down the personalized pricing path for its own sake is risky and doing so without regards to its fit with the rest of the customer experience levers is disastrous. Just because technology makes it possible to create legal first-degree price discrimination doesn’t mean it should be a primary driver in your strategic arsenal. The practice is here to stay and needs to be part of retailers’ larger strategy revolving around creating and delivering value to their customers. Consumers do expect to get something of value for sharing their personal information including purchase history, wish lists and browsing history.
Keep the customer’s perception in mind and realize that customers do value transparency and are quick to condemn when they perceive unfair treatment.
I think we all agree that personalized pricing should be part of an overall 1 to 1 personalization strategy. I also think that personalized pricing should go hand in hand with 1 to 1 customer “experience.” Retailers have to think about delivering personalized experience to the customers as part of their overall personalization strategy. Experience can be value or services, but it should be differentiating enough for each customer.
Many retailers today offer personalized pricing in “stealth mode,” in which discounts are delivered to specific shoppers directly without other shoppers knowing about them. With this approach, personalized pricing is hidden and there is less risk of alienating shoppers who don’t receive the discounts.
Personalized pricing is a great way for retailers to reward their top shoppers, and its use will increase over time with more sophisticated mobile, social and digital means of communicating with shoppers.
Personalised pricing needs to be carefully thought about. There’s the potential for it to cause dissatisfaction for customers (whether that’s them knowing someone got a better price than they did or because a retailer didn’t give them a discount this trip) and to essentially undermine a retailer’s set pricing. Personalisation on the whole is important though and I think pricing can form part of this. A good way of achieving it may be to use a brand loyalty scheme, but give customers some control over what benefits they get. Waitrose’s Pick Your Own Offers system is a good example of this — all customers can get a discount if they sign up, but they get to pick what products the discount is on so they can tailor it to their preferences.
The commenters today seem a very optimistic lot, emphasizing that pricing SHOULD form only a small part of customization strategies … if only experience didn’t suggest it will smother everything else.
Personalized pricing, and personalization in general are about building stronger loyalty with your customer. Pricing and discounts are only one part of that equation. The goal is to build a trusted relationship with your customer so that they become loyal customers. No retailer should be considering personalized pricing as the sole feature of a personalization strategy. It may be most useful as a reward for the most loyal customers and is not something retailers should expect to apply to every shopping visit.
For some customers, price is not the most important factor in a purchase decision — knowing the customer’s buying habits will tell the retailer whether or not they need to discount a price in this manner. We really should be talking about how a strong loyalty program can take advantage of pricing as one of its personalization capabilities to build more trust with those customers.
If personalized pricing is the strategy, then discounting is the tactic. As a customer, I would never expect to be targeted with “Just for you, Marge, pay more!” Even if I’m the target of a special event campaign like a designer trunk show or a pre-season event, I expect to receive some price consideration if I buy.
Retailers who utilize a personalized pricing strategy may be opening a Pandora’s box they may not be able to close. I will not only want to pay less, as a preferred customer on those terms, I will expect it.
If retailers don’t want consumers to expect discounts because of personalized pricing strategies, then they shouldn’t train customers to expect a discount. Once is a promotion. Twice is nice. Three times is a habit. And, then they are trained.
Where personalized pricing (i.e., negotiated prices) makes sense, sellers will probably need higher base prices. Moving base prices higher and making them credible will make a varying discount strategy attractive to buyers. However, online price comparisons will limit this to only a few industries and markets. Customers will share transaction price information and will move toward sellers with lower quotes, driving transaction prices down.
Personalized pricing isn’t about offering more discounts, it’s about offering less — the minimum discount per customer to achieve the desired results. Consumers who exhibit less price conscious behavior will no longer have access to the discounts created for the more frugally minded.
For now, to reduce a constant “discount expectation” effect and foster loyalty, retailers should utilize personalized pricing either in their rewards programs once customers meet certain requirements (collect n points, spend $n, etc.), or as a part of an in-store promotion.
This study by the Journal of Consumer Behavior brings us another example of the insights brands and marketers can now achieve with the data that mobile technology provides — a level of personalization unlike anything that’s come before at scale.
Personalized price represents one of those levels of personalization. This approach to pricing, however, should be taken as part of a much deeper way of engaging the consumer. It’s not sufficient to entice shoppers with a price that merely dovetails with what we can detect about audience, timing and retailer characteristics: the data that accesses this behavioral key should also drive a series of anticipatory experiences and offers. We want to trigger discovery. What can data tell us about what the shopper would like to encounter next in terms of merchandise and new experiences? Data can forecast these next moves just as well as it can identify a price that’s primed to prompt conversion.
Price becomes one, but not the only, or even the most important, factor in the decision-making process. I never recommend competing on price, in fact. Products and services need to stand on their own value. And when these new discoveries are closely matched to customer context, Dr. David’s well-taken concerns about dashed expectations around personalized pricing — the person who pays less is happy; the person who pays more wonders why — can be countered by authentic and meaningful offerings. It is the data-driven moment of anticipatory inspiration that will truly fuel the transforming relationship between brands and consumers.