Smart sales professionals are in prime position to offer personalized pricing. But how do you know when personalized pricing is the smart move?
With personalized pricing, you can take a detailed look at customers – everything you know about needs, revenue, demands, behaviors and influencers. Then use that information to offer a price you think will close the deal, benefiting customers and you.
Effective pricing gives loyal customers better deals than customers with no history or relation to the salesperson or company. Plus, you can change terms when needs, demands and the industry shifts.
Companies agree there’s value in personalized pricing: Nearly one-third say they are maximizing opportunities in personalized pricing, a study in Retail Systems Research found.
3 degrees of personalized pricing
Personalized pricing – also called price discrimination – happens every day across industries and at different degrees.
- First degree price discrimination. This personalized pricing strategy is the most difficult to get right. Sales professionals need to gather and analyze loads of data on prospects. When it’s done right, sellers make maximum profit and customers are highly satisfied with the value for their dollar. It works in industries where price is negotiable – such as car sales – and when there are many negotiable factors – such as air travel with variables like destination, plane capacity, timing, etc.
- Second degree price discrimination. In this pricing strategy, companies set different prices based on what various groups of customers prefer. Companies execute it through quantity discounts and through loyalty programs or reward cards to frequent customers.
- Third degree price discrimination. With this, companies set different prices based on unique demographics within a customer base. For example, military discounts, lower-price admission for senior citizens and children discounts.
Personalized pricing comes with benefits, risks, successes and failures. Let’s look at what works – and what doesn’t.
Pros of personalized pricing
Personalized pricing is ideal for some industries. And technology makes it a valuable pricing structure for more industries these days: Companies can capture data customers are willing to share. Then they use algorithms to create and offer the right price for individual or subsets of customers.
Other pros of a personalized pricing approach:
- It can increases profits. Some customers are willing to pay almost 20% more because they value a product or service more than others do. Customers who value a product or service less will find it at a lower price elsewhere. You may lose those customers, but you can spend more time and resources on the most valuable customers.
- It builds loyalty. Customers who pay what they think a product or service is worth to them – and gain a customized experience – are more loyal.
- It expands the market size. Researchers found that personalized pricing can increase the number of people who can access a product or service. Prospects who once thought they couldn’t afford you might buy when it’s priced to meet their perceived value.
- It creates excitement. According to the RSR Research study, Retail Pricing 2017: The Dawn Of Personalized Pricing, the companies that practice personalized pricing best are able to create excitement around their brands and drive more demand.
Cons of personalized pricing
Of course, personalized pricing has its perils, too.
- Customers may not react well. If they know about the variances in prices, many will find it unfair. They’ll feel they’re being taken advantage of if they’re offered one price and another customer gets something better.
- It’s creepy. Customers usually don’t like when companies know too much about their personal shopping habits (even if they give up the information) and capitalize on the knowledge. They might feel like it’s an encroachment on their lives. Too much customization based on what they’ve said and done backfires.
- It’s dangerous. Personalized pricing can be construed as unethical or even illegal (see more on this below), creating a bad business reputation.
- It’s a slippery slope. A Baylor University study found that customers who get discounts under personalized pricing plans often come to expect even deeper discounts – and are disappointed and ready to jump ship if they don’t get them.
- It creates operational difficulties. With varying prices, it can be difficult for companies to accurately estimate demand, leaving them overstocked or out of stock.
“Implementing more targeted personalized pricing, especially without losing the support of either consumers or employees, is not easy,” says Nikki Baird, managing partner and co-author of RSR study. “The reality is that retailers cannot jump into personalized offers with both feet. It must be a gradual evolution of increased targeting and relevancy over time.”
When personalized pricing works
It’s no secret that customers will pay more for what’s valuable to them. The secret is in figuring out which customers value your product or service more. That’s when personalized pricing works best: You find the sweet spot where customers pay what they feel you’re worth and you make the right profit.
Here’s a practical example of optimizing personalized pricing.
ZipRecruiter experimented to find out 1) if personalized pricing would work and, 2) the prices that would work for their evolving online employment-placement service.
For one month, ZipRecruiter randomly charged new customers prices ranging from $19 to $399 – a vast change from its standard $99 fee. In that time, they also gathered piles of information on new customers – location, company type, benefits offered, financials – to determine how much each would likely be willing to pay for the service.
In the second month of its personalized pricing experiment, ZipRecruiter used the data to build algorithms that generated prices specifically for new customers ranging from $142 to $399.
They lost about a quarter of the customers when price doubled. But revenues jumped 14% because fewer customers paid more, suggesting ZipRecruiter had been under-charging for a service that was highly valued.
The experiment revealed the optimal price, profiles of customer types and the maximum each was likely willing to pay. But note: Despite having the data to optimize a personalized pricing program, ZipRecruiter went with a tiered program.
When personalized pricing fails
Personalized pricing can go wrong – very wrong. Legally, ethically, financially wrong.
For instance, Match Group (parent of the enduring Match.com and newer app Tinder) faced legal troubles. A court questioned its attempts to charge older people higher prices for the dating app than younger users. The California Supreme Court ruled that it was more than a personalized pricing strategy: The practice violated civil right’s laws against age discrimination. The court reminded all businesses that pricing differences based on protected classes such as race, gender, religion or age violate non-discrimination laws.
Ethically, studies have discovered issues: When the Princeton Review set prices based on the customers’ zip codes, Asian subscribers were twice as likely to be charged a higher price, according to a ProPublica study. In a long-established study on car negotiation, researchers found the markup on final prices for black women was triple the price offered to white men.
Best practices for personalized pricing
Personalized pricing can be more difficult in our digital sales world.
Take for example, the car salesman. Car sales is one industry that has historically used personalized pricing. Salespeople could (and can) asses ability to spend by:
- seeing the car a customer currently drives
- how the customer dresses
- what catches the customers’ eye, and
- hearing about the customer’s profession, family and hobbies.
Now, apps and websites eliminate revealing face-to-face conversations that helped salespeople determine a personalized price.
What works now
So what works today? Here are six best practices and tips on personalized pricing:
- Take it slowly. If you want to introduce personalized pricing, slowly implement the plan. You can effectively communicate why there are options and how customers will benefit from it. Remember the creepy factor: You don’t want to bombard customers with everything you know about them and how it affects their price.
- Give customers more control. Generally customers react to and accept differentiated pricing if they feel they have some control in the process. They want to have choices about how much information they give up and eventually how much they’ll pay.
- Expand on offers. Use personalized promotions to get customers to try other products. Once you understand what customers will spend on your products or services – coupled with the knowledge of what they love – you can introduce them to additional products at the right price.
- Recognize the time as much as the person. Personalized pricing can be targeted toward specific people at a specific time. In Where Next Think Tank, John Lenahan, commercial practice lead at Esri, says, “It’s not just about where people are; it’s also about when they’re there.” Personalized pricing on certain products or services can adapt to time of day, year or week. Look at when customers need or think about products or services. Merge that information with your data on ideal customers and product and service placement.
- Avoid secrets. One of the drawbacks of personalized pricing is that it can feel sneaky to customers: No one wants to hear the next customer paid less than he or she did (as it often happens with airline passengers). Don’t try to hide that you use a personalized pricing approach. Instead, tell customers you want to help them find the right products or services at the right time and with the right prices.
- Emphasize value. Customers will more easily embrace personalized pricing if they recognize the value of engaging with a company. Customers want to make connections and see what they have to gain from investing in your products or services at a price that makes sense to them.
