Personalized promos add up to a ‘win-win’ for retailers and consumers

Discussion
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Oct 10, 2019
Tom Ryan

A university study finds personalized promotions can potentially be a lucrative opportunity for retailers to extract money from consumers while also enhancing customer satisfaction.

In a statement, Yuqian Xu, a professor of business administration at the Gies College of Business at the University of Illinois and lead author of the study, noted that scholars have long argued over whether personalized pricing is good or bad for the consumer and for society.

“Personalized promotion is a bit like price discrimination, which is somewhat controversial historically, because you’re selling the same product at different prices to different consumers,” said Prof. Xu in a statement.

The research focused on the impact of “online-to-offline service platforms,” citing DoorDash as an example, that are providing retailers and delivery platforms with access to consumer data to drive personalized offers.

The study examined a leading online-to-offline platform in China with more than 50 million active users. Versus control stores, the study found those offering personalized promotion drove, on average, a 1.6 percent increase in the total monthly transaction amount; a 3.2 percent increase in the number of items purchased per order; and a 2.2 percent increase in the probability of a five-star rating.
 

“Our main results demonstrate the personalized promotion can be a ‘win-win’ for both the retailer and the consumer,” Prof. Xu said.

Still, the study had some stipulations to success: 

  • Overall, the effects are greater for new consumers and less for frequent and high-value consumers;
  • The
 positive effects on revenue increase at first, but then decrease over time;
  • The positive effects on consumer satisfaction become significant “only after a sufficiently long time period — nine months or so.” 

The researchers concluded that, over time, retailers would need to re-target less engaged consumers and try to target new consumers. 

“The platform and the retailer should be patient,” said Prof. Xu. “But since the positive effects decrease in the long run, that means that the platform and the retailer also should be aggressive about courting new customers.”


DISCUSSION QUESTIONS: What changes in consumer behavior do you expect to see should personalized pricing become more prominent? Are you a fan of more extensive personalized pricing?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"If there is any discriminatory bias in the person or the offer, then retailers are at risk of violating regulations – and wrecking their reputation with consumers."
"There is also a risk of driving away shoppers who don’t qualify – this is especially true in our current world of social media and oversharing. Proceed with caution."
"The fact that the effects are greater for new consumers and not so much for high-value consumers says it all to me."

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11 Comments on "Personalized promos add up to a ‘win-win’ for retailers and consumers"


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Bob Amster
BrainTrust

The probability of personalized pricing is medium and the results will be outrage by the consuming public.

Nikki Baird
BrainTrust

It’s interesting to me that the effects fade over time. Even though they found you have to “be patient” and give it like nine months to get the full benefits of personalized promos, it’s still something of a sugar-hit, rather than something that is sustainable.

I have long been a fan of personalized pricing, especially as a way to overcome price transparency challenges, where zone or segmented pricing is exposed thanks to online. “That may be THE price, but here’s YOUR price.” However my enthusiasm for it has declined some, given the rise of AI in personalization and the lack of significant guardrails to prevent AI from making bad assumptions – for example, not offering discounts on premium items to people who live in poor communities (as some retailers got in trouble with in the U.K.). If there is any discriminatory bias in the person or the offer, then retailers are at risk of violating regulations – and wrecking their reputation with consumers.

Lee Kent
BrainTrust

The fact that the effects are greater for new consumers and not so much for high-value consumers says it all to me. Think about how much harder and costlier it is to get new customers. These retailers would have to be ever moving the cheese in order to attract new customers and that is always a risk. And that is my 2 cents.

Ananda Chakravarty
BrainTrust
I’m not sure how prevalent personalized pricing can become, especially because of the general trend that information disseminates quickly. People will know if there are differing rates. The study covered a broad set of customers and found a 1 percent to 3 percent lift for buying frequency, AOV, etc. in China specifically. For specific retail verticals and other markets the impact may be different. More importantly, consumer behavior will only change to the degree that consumers can get better prices or game the system. There may even be sites that crop up to offer consolidation of pricing and enabling “best price” options for the customer. For some who are seeking a bargain, this will be exciting and another opportunity to save, for others it will be an annoyance. Large price differentials will be hard to achieve and I surmise differentials will sink and plateau to the same levels that retailers gain: 1 percent to 3 percent. I can’t imagine customers paying 20 percent premiums on a product because they received personalized pricing — especially with… Read more »
Dr. Stephen Needel
BrainTrust

A lot of the impetus for the interest in personalization has been surveys that purport to show Millennials love to feel special and personalized promos and pricing makes them feel that way (as long as they know it’s “for them”). The surveys are terribly flawed and the conclusions are flawed. Very few research studies show any positive impact and this one seems to show that impact is small and fleeting and might not be worth the effort. Note also – it was done in China, and the there is not a one-to-one correspondence between Western shopping patterns and Chinese patterns.

Shikha Jain
BrainTrust

Successful personalized promotions are contingent on the quality of data that is available. If a r/e-tailer is able to define the shopper segments – their price sensitivity, how much they use promotions to trigger a purchase and what types of products/promotional events they gravitate towards – then personalization can be very effective. However as the study corroborates, a common pitfall is when r/e-tailers become exuberant about the immediate financial uptick they get from promotions. This is not sustainable long-term as promotions become a lever to meet financial targets and consumers get hooked on using promotions to trigger a purchase. R/e-tailers then have swung too wildly the other way and look for avenues to reduce their promotional dependence.

Jeff Weidauer
BrainTrust

Anyone who has used promotions to drive business won’t be surprised at the findings here. People will flock to lower prices, but after a time the discounts become an expectation. Providing personalized pricing sounds good, but the effects will be short-lived and fade over time as consumers see it as table stakes. There is also a risk of driving away shoppers who don’t qualify – this is especially true in our current world of social media and oversharing. Proceed with caution.

Ralph Jacobson
BrainTrust

Personalized pricing has been around for a long time, in the form of mass customization. In many cases, rewarding loyal customers with specific promotions. Now technologies exist to target individuals, both existing and new customers, to build a “persona” of that consumer and address that persona with specific promos that are hopefully relevant to the persona. I have seen this work, and it can be a compelling reason for the persona to shop your store.

Sterling Hawkins
BrainTrust

Personalized pricing is inevitable. We see it in our credit card rates, our airline tickets and increasingly we see it as a standard in retail. Done right, not only do the economics work, but it’s a better customer experience all around.

Ken Morris
BrainTrust

I believe personalized pricing is just the inevitable maturation that began with chain, division, zone, store and now customer pricing. This personalized approach has always increased sales whether done manually or electronically. I see consumers that will be much more likely to identify themselves via loyalty programs and opting into these programs. It is not discriminatory to reward loyalty.

Cate Trotter
BrainTrust

Personalisation definitely feels like it’s something that should be happening more in retail. When it comes to pricing though it’s a difficult one. Everyone likes the idea of getting a good deal – the idea that someone else might be getting a better one than you might cause some friction. Could it be that customers will hang on hoping for a better deal (something that is already being done today by some)?

It’s also interesting that the benefits take time to show themselves but that they’re better for new customers. I think we all feel that if we’re a loyal, regular and/or high-spending customer that we should be treated better. You often see existing customers complaining about new customer only deals — personalised pricing could spark the same dissatisfaction.

wpDiscuz
Braintrust
"If there is any discriminatory bias in the person or the offer, then retailers are at risk of violating regulations – and wrecking their reputation with consumers."
"There is also a risk of driving away shoppers who don’t qualify – this is especially true in our current world of social media and oversharing. Proceed with caution."
"The fact that the effects are greater for new consumers and not so much for high-value consumers says it all to me."

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