Pinpointing Personalized Pricing's Potential

Customer Experience
Customer Experience
Consumer data now enables companies to tailor pricing based on previous interactions, but businesses must be sure to build their pricing strategies on trust to limit the risk of alienating current and prospective customers.

Today's technological advances allow brands to connect with every customer on an increasingly personalized level. Through social media and mobile devices, companies have greater insight into each individual's behaviors and sentiments, resulting in data never before gleaned through traditional analytical methods. But, while consumers continue to benefit from such improved intimacy, receiving relevant marketing communications when and where they want it most, brands have begun to push the boundaries even further as they look to profit from these growing relationships to a greater extent.

Because social sentiment and mobile behavior allow companies to examine how customers feel and interact, both parties gain something from the sharing of such information. Companies are able to suggest more pertinent, timely offers, developing a connection that keeps customers loyal while encouraging repeat purchases. However, with this ability to monitor purchase history and assess behaviors, many companies are now using this information to develop personalized pricing strategies that maximize monetary profits while maintaining relevance.

Through personalized pricing, companies can adjust the cost of any given item based on the customer at hand. These adjustments are typically based on purchase history, past interests, and the consumer's location. As Don Peppers, founding partner of Peppers & Rogers Group, highlights, brands want to charge different customers different prices for one very simple reason: It allows them to collect more money from those customers who are willing to pay more while still being able to sell to other customers who are more price sensitive.

"Suppose you have just 10 potential customers, and each desires your product with a different 'intensity' so that one is willing to pay just $1, another would pay $2, the third would pay $3, and so on up to the tenth customer willing to pay $10," Peppers says. "If a company can sell its product to every one of these customers for as much as each person is willing to pay, they can collect a total of $55. However, if they must charge a single price to all customers, the maximum they can make is $30-either by charging $6 to the five customers willing to pay at least that amount or by charging $5 to the six customers willing to pay at least that amount."

By implementing such flexible pricing strategies, companies allow themselves to maximize their overall gain while ensuring their product reaches the largest amount of customers possible. Companies are, therefore, able to meet a greater portion of the total demand for their product by charging a larger proportion of their customers the maximum they would be willing to pay, individually, Peppers emphasizes. All customers are different-some will desire a product more than others, others are more likely to buy on impulse, and many will trade quality for price. But, as this practice becomes more widespread, many questions and concerns come to mind.

Personalized Pricing In Action

For years, consumers have seen many versions of personalized pricing throughout their every day lives. Whether it's children and seniors receiving reduced movie ticket prices, or students receiving a discount on their latest computer purchase, all are aware of and comfortable with such practices existing. Airlines also offer varying prices to business travelers, who require regularly scheduled service, as opposed to leisure travelers, who are more flexible with respect to when they travel.

But now, as personalized pricing becomes a differentiator in today's competitive market, brands are utilizing the data records generated by interactive technologies to treat individuals as just that. For some companies, such as Staples and Home Depot, online prices are often based upon the consumer's setting. These retailers use location-based technology to determine where the consumer is at the time of their search to assess whether they are within close proximity of the chain's rival. If so, the price on-screen will appear lower than for someone located further from the competition. They also take browsing history into consideration to establish whether or not that customer may have also been searching for the product on a competitor's website. Both tactics encourage the potential customer to complete the transaction with their given brand instead of defecting to the competition.

Safeway uses its loyalty program to a similar extent, offering customers deals that correspond to their previous buying behavior. By understanding how each individual customer interacts with the company, Safeway can use the behaviors attached to each cardholder's loyalty profile in order to reach out with relevant offers that may nudge them to purchase something they may have bypassed otherwise. These discounted prices pertain to the consumer's overall interests, strengthening relationships and boosting the company's sales.

"Personalized pricing, in theory, doesn't change between online and brick-and-mortar, but the specifics do," says Matthew Shanahan, senior vice president of marketing and strategy at Scout Analytics. "For example, a personal buyer for an in-store customer can interact and provide real-time services that are unavailable online. There are many differences between the two, and powerful combinations of the two. Creating a unique and valued experience, product, and support is the key to success."

Transparency as the Key to Success

When companies implement such pricing processes, they must also be sure to develop a level of transparency that allows consumers to openly and honestly understand this practice and the methodology behind how such deals can be earned. Companies must fully disclose any restrictions or conditions in an understandable manner to minimize the potential for alienating customers who may be uncomfortable with the practice.

Many customers find data collection mildly unsettling, but if companies attempt to conceal what they are doing in terms of personalized pricing, they risk becoming untrustable in the eyes of those they depend on to succeed. By laying out all the details upfront, companies recognize the possible hesitation of their customers, working to foster trust and loyalty from the start while also helping consumers understand how they, too, can earn and receive such specialized offers.