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What do retailers owe customers when it comes to personalized pricing?
Cleber Ikeda is investigative analytics and intelligence director at Walmart. Any views and opinions expressed herein are personal and may not represent those of Walmart. The content of this article does not contain nor reference confidential, proprietary information of Walmart.
Artificial intelligence-powered dynamic and personalized pricing offers retailers a means to satisfy customers and protect profit margins at the same time. It’s not hard to understand why retailers are increasingly employing these tools in their operations. Beyond the business potential, however, there are also ethical concerns raised by their use.
Dynamic pricing is an automated pricing process that leverages data analytics on established parameters to enable fast pricing decisions by anticipating always-changing market conditions. Personalized pricing is a subset of dynamic pricing whereby retailers segment customers and sell them products and services at prices they are willing to pay.
Being able to charge customers a higher price where they see a value provides retailers with opportunities to increase profit margins. Tighter pricing for items in instances when customers are reluctant to go up can generate frequency of purchase and, in turn, create opportunities for loyalty building.
The primary ethical dilemma connected to personalized pricing is the customer perception of fairness. Using zip codes, for example, to charge higher prices in wealthy neighborhoods might not reflect the purchasing power of less fortunate inhabitants at the border of those areas. This practice could prevent some customers from accessing products and services they could afford at regular prices. Wealthier customers might also perceive unfairness and intrusion of privacy by knowing they are paying more only because they can afford it.
Privacy regulations and customers’ expectations of their privacy are key aspects to consider. If personalized pricing is being deployed, customers should be informed in easily accessible, plain language. In that sense, privacy and transparency go side by side. Customers should have access to their data and determine if they want to authorize companies to use it and in what ways. International laws such as GDPR and CCPA cover this.
And finally, what if something goes wrong? Retailers must be in the loop to make sure automated price changes are not violating customers’ rights. That ability to oversee unintended pricing outputs should be supplemented by the ability to manually take over pricing when conditions demand.
Discussion Questions
DISCUSSION QUESTIONS: What are the ethical considerations retailers should consider in deploying dynamic and personalized pricing? What fail-safes need to be put in place to avoid losing the trust of consumers?
Poll
Loading …BrainTrust
Suresh Chaganti
Consulting Partner, TCS
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
Personalized pricing is a minefield and has more risks than benefits. Personalized pricing is legally OK but raises significant ethical concerns. Customer backlash and trust erosion are quite possible.
There are numerous ways to personalize the pricing while not affecting an entire class of customers. It could be based on detecting exit intent and intervening, offering better pricing for abandoned carts, offering individualized promotions – just about anything other than changing the basic price.
Pricing based on the class of service is also OK – charge more for in-person pickup, for instance.
I agree. People may have accepted that airlines may charge different prices for the similar seating on the same flight, but imagine the uproar if pricing went beyond pricing zones and people starting posting online that I paid X and you paid Y for the same item on a regular basis. We would quickly move from talking about personalized pricing to price discrimination.
Thanks for your comments, Suresh.
Flexible pricing models are even more relevant and useful in today’s world where supply chain disruptions and inflation are key issues. Flexible pricing allows retailers and consumers to win, but transparency is crucial to these models’ success. With personalized pricing especially, consumers should be made aware by retailers that it’s happening. The idea of opting in will need to be an inherent component to combat the fairness challenge.
A prime example of personalized pricing that keeps consumers happy by requiring them to opt in is negotiation commerce. Since shoppers know they’ll end up with a different price than their peers due to their haggling skills, it feels much more fair and fun.
You make a good point – offering better pricing could be a good negotiating tool to get shoppers to opt in under new digital regulations.
Hi Melissa. I loved your comment! Flexible pricing models can be a win-win, since transparency aspects are observed.
At Nibble we are pioneering negotiation tech for ecommerce and we passionately believe that personalised pricing can be done right when there is a conversation. Ethics are vital designing this type of AI and we don’t gather any personal data on the shoppers to offer them a valuable (and fun) experience.
Bigger discount for a bulk purchase? Special deal for loyal customers? Speedy shipping of 10% off the price? let the customer choose and you can personalise pricing for a win-win outcome
Personalized pricing isn’t ethical. If a retailer charges $10 for an item then it should be priced at $10 for every customer, regardless of where they live.
Just like there is no crying in baseball, there are no ethics (or almost none) in pricing. Retailers have always had multi-tiered pricing. Company pricing, division, region, zone and store pricing have always existed. Personalized pricing is just an inevitable evolution in the pricing model. As we gather more data analytics will determine the optimum price that I, as a shopper, am likely to buy.
When you think about it, there are really only two ways to arrive at purchase price: one is tagging something with a price and marking things down to increase sales if necessary. The other is when you go to a traditional market and there are no prices on anything. You start low. The merchant cries. Your best move as a customer, if you want a better price, is always to start walking away.
But personalized pricing, fueled by the merchant’s knowledge of everything you’ve ever done online, does not make this a fair fight any more. Why? Because the merchant now knows exactly when you’ll walk away, and if you’ll come back. It’s all about data analytics, and it’s a very one-sided game.
Ken, thanks for your comments. There is currently a nascent, genuine discussion on AI Ethics. That is gradually changing people’s perception on how companies take ethics into consideration in their business decisions – including over the lifecycle of their AI systems. Here a few additional references to our readers:
Transparency and fairness is more important to the customer than ever. With the abundance of information that is accessible to the customer, the retailer must tread lightly when considering dynamic and personalized pricing.
These types of tools should be used to determine the best price but also standardized pricing across like-brands across the globe. It is very common for luxury shoppers to fly to another country to shop a brand because pricing is more competitive due to currency value and this is what we need to avoid.
Retailers need to invest in the right tools to determine the right price that is profitable for them but also be conscious of keeping the customer’s trust and being fair to shoppers worldwide.
Thanks for your comments, Liza. It is all about trust, right?
I have always thought dynamic pricing was a disaster waiting to happen. Personalized pricing, if it’s based on loyalty, is a lot easier for customers to swallow but just changing the price because you can has never been a good idea.
The first time I see a price change in front of my eyes is the last time I will shop at that retailer.
Thanks for your comment, Paula. I’m still optimistic about it. If we manage it in a way that brings more transparency to the shopper, that could still be a win-win. What if we mixed price and product differentiation as an alternative? What if retailers use the huge amount of data to convey a better product/service purpose, delivering a primer experience and, with that, somehow charge an acceptable higher price by the customer? Open and exciting questions….
Personalized pricing is good for the retailer, and rarely for the consumer. Its only goal is to charge the highest price possible and still make the sale. The ethical challenges are numerous and varied. Nevertheless, personalized pricing is the way of the future.
Thanks, Jeff. I agree there is no way back. And this is a great reason to keep pushing for ethical practices in the whole customer experience, including with prices.
Imagine a retailer advertising that different customers pay different prices — what would the reaction be across the customer base? If a retailer has to keep its policies private, those processes are probably not going to be popular.
Thanks for your comments, Cathy. Customers and regulators have been pushing for more transparent AI practices, so we will have to solve this problem and find a balance.
Personalized pricing can be a powerful tool for both retailers and consumers alike and offers more benefits to both parties if done correctly. The key to doing it correctly is to start with consumer data and listen to them rather than creating logic based on factors which are not directly tied to their shopping decisions or are based on things like ZIP codes or demographics which runs the risk of discrimination. If a customer or customer segment has shown to be very elastic for category A and not for category B, it’s in everybody’s best interest to price those categories differently. The retailer wins by gaining share in category A and margin in category B and the consumer wins by getting great prices on the products they care most about. The best pricing platforms can add even more value by rigorously enforcing rules to make sure that prices are fair for all consumers – preventing pink taxes or higher margins/prices on products targeted to certain communities. The right analytics, solutions, processes, governance and objectives can make personalized pricing a powerful way for retailers to offer the right price in the right channels on the right products at all times to their consumers.
Great comment, Matthew! I really appreciate it! We do have to go to the basics and do analytics correctly and with diversified perspectives. In that regard, I agree with you 100%: listening to customers is key! Would you have some additional references to share with our readers?
If we only look at the “fairness” of variable pricing this seems like a bad thing. But wielded properly it can be an instrument for good and an important way for retailers to maintain the profit margins they need to stay in business. It isn’t fair to charge different prices to different customers, but what if variable pricing wasn’t targeted to the shoppers’ ability to pay but rather to availability of the product? I see this as a fantastic tool to help retailers hold on to profit margins when legit supply chain issues reduce needed stock of popular products – raise prices across the board instantly to weed out people who are merely stockpiling. Conversely, it could be used to reduce pricing, either as a reward to high value loyalty subscribers or as a service to the community – such as quickly lowering prices of building materials in areas hit hard by disasters.
DeAnn, I loved your comment. Thank you! I do believe purchasing power as the main input for personalized pricing can be tricky, with potential to generate unexpected, unintended outputs that can harm retailers’ reputation. In that sense, product differentiation might be a smarter strategy.
This is a tricky one. While personalized promotions may well be the order of the day there are huge potential pitfalls. Economist Tim Harford wrote some years ago about how specific pricing was seeking to charge more to those deemed to be able to pay more. There have also been suggestions over the years that certain websites have charged Mac users more than PC users because Mac users are deemed wealthier.
Ethically it is a problem, however legislation does not always provide for consumer protection – for example the UK consumer energy market allows energy retailers to charge the poorest people more for their electricity through the use of pre-pay meters.
Ethically, many are far more comfortable with tiered pricing whereby there may be differences in price yet the differences the consumer attains are clear.
Great input, Oliver. Regulation is playing and will continue to play an important role on how companies disclose and communicate on their algorithms.
If retailers deploy personalized pricing at an individual level (not zip codes, not large segmentation schemes) it is simply an extension of the overall customer loyalty or promotional strategy.
The key is taking into consideration the individual customer spend, omnichannel purchase behavior, visit metrics, LTV, etc. With that in mind, personalized pricing is not only ethical, it is a proven key to overall business success, builds customer loyalty, differentiates competitively, and is completely acceptable (and appreciated) by consumers that understand you are deploying this type of logic.
Amazon has been doing this for over a decade, it drives 25 percent of their profitability – it is surprising to me that some may still be on the fence on this topic if traditional retailers simply apply a common sense approach.
Thanks for your comments, Brent. I think many people are still on the fence for some reasons, e.g.: price is most of times directly related to purchase power, which leads to privacy and fairness concerns; and lack of transparency of what companies are doing with customers’ data – and how that data has been used. Transparency, proper data analytics and ethical AI development/deployment are only some of the factors that will help us to solve this issue.
Pricing optimization has been right up there with the assortment optimization emerging trends. With an abundance of choices across all shopping channels, consumers have clear advantages as to who they shop with, with price and quality at the center of their decision-making processes.
Retailers have always had the right to flex their pricing strategies to meet the changing consumer demands and be competitively priced. With the emergence of pricing optimization suites, dynamic pricing is a part of the equation, and customers certainly keep track of how competitively priced one retailer is to another. As long as there is trust and transparency behind these decisions, dynamic pricing is a lever that retailers could leverage to maximize revenues and gross margin potential.
However, personalized pricing strategies based on the customer’s geographical locations are challenging on many fronts, including legal, compliance, and simply from a relationship perspective with the customer.
Thanks for your comments, Brandon. Agree: trust and transparency with customers are key when it comes to leverage their data and run profitable businesses.
Retailers still struggle to manage data and deliver relevant individual promotions, so it is extremely unlikely they can implement personalized pricing programs without causing great harm to their brand.
Nobody wants to be the person who pays more than others for the same product or service, regardless of one’s ability to pay.
Flexible pricing might work great for a company’s profitability. However, brands need to ensure that they are delivering on the brand’s promise.
It is the brand promise that sets customers’ expectations. If the brand has a good story to support dynamic pricing, and if the brand is transparent about it and makes it fun for customers to buy, then I think it’s completely fine. In fact, customers might like the story and become brand loyal.
I think when buying from marketplaces, customers might not mind dynamic pricing. In the case of specialty brands, their promise is to give consistent experience across all the channels. So, if specialty brand retailers start offering dynamic pricing, their customers could feel cheated and it could affect the brand’s goodwill.
Negotiation commerce is another interesting concept that in my opinion, is a great way to enhance customers’ buying experience. If done correctly, it can serve as a differentiator and provide an adrenaline rush to your customers, causing them to choose you over the competition. This way you can satisfy customers and also boost profitability.
Transparency is the key to an ethical and customer-friendly dynamic pricing strategy.