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Should You Use Dynamic Pricing?

Will engaging in dynamic pricing help or hurt your business?
October 1, 2005
URL: http://www.entrepreneur.com/article/79892

Personalized pricing--also known as customized or dynamic pricing--enables e-tailers to charge different customers different prices for the same products based on information collected about them, such as what they've purchased in the past, their price sensitivity and so on. First-time buyers at a website could see higher prices than the company's repeat customers. Or price-conscious consumers may get lower prices, while people that demand more customer service could pay higher prices but receive longer warranties and express shipping for their items.

The practice may be making headlines, but it's also controversial--and plenty of e-tailers engaging in it aren't comfortable admitting it. A study of adult online consumers released this spring by the Annenberg Public Policy Center of the University of Pennsylvania found that 87 percent of respondents said they did not think personalized pricing was OK.

Despite such attitudes from consumers, many marketing experts believe personalized pricing is a necessary part of doing business--and that if you don't use it, your competitors will use it against you. "I don't think e-tailers use dynamic pricing enough," says Peter S. Fader, a marketing professor at the Wharton School of the University of Pennsylvania in Philadelphia. "I think every e-tailer has an obligation and a fiduciary responsibility to figure out what people are willing to pay and charge them that much."

If your customers find out that you've engaged in personalized pricing, be ready to accept the consequences. According to Paula Rosenblum, director of retail research at Boston-based market research firm Aberdeen Group Inc., in today's online retail environment, consumer loyalty is incredibly low. "A consumer would switch in a heartbeat, " she says. "Price shopping is done as a matter of course, and it wouldn't be all that hard [for a consumer] to identify [himself or herself] as someone else, just to see the price on that site. Get caught, and you're dead."

Know Your Limits
Saffron Rouge Inc., a Guelph, Ontario, business that sells organic beauty products online at www.saffronrouge.com, doesn't expect to experiment with personalized pricing--but it does use customer data to create a personalized experience for shoppers. "Businesses should be focused more on adding value, rather than trying to bend and twist their customers this way and that," says Jeff Binder, 30, who co-founded Saffron Rouge with his wife, Kirstin Binder, 29.

Saffron Rouge uses a personalization engine to offer different specials and content to different customer segments, such as visitors new to the site or those who've entered via a search engine. "Now, when new customers go to the site and click two pages deep, they'll see a pop-up that talks about some of the key benefits of shopping with us and what we're all about," says Jeff, whose company had nearly $1 million in sales last year and is on track to have over $1 million in sales this year.

Jeff has also tested giving these customers a promotional offer, such as free shipping, a few dollars off or a free lip balm on their first order. While customers have responded well to these tests, "The most effective was the educational content about why [to] shop with us, so we've changed the campaign to run just that one ad," says Jeff.

These kinds of promotions may seem like customized pricing, but there is a subtle difference in the eyes of the consumer. Certain customers are being offered special discounts when they buy a product or service, but the base prices remain the same.

Jeff uses SiteBrandsoftware for his personalization engine. He's still in the early stages of use, but he says, "We've already seen that the product pays for itself, and as we begin to do more with it, it's going to be a very worthwhile tool." In addition, his NetSuite e-commerce system allows different prices to be displayed to wholesale and retail customers, even though he does not focus on the wholesale market right now.

"To do price-based personalization effectively, you have to have an enormous technological infrastructure in place," says Jeff.

Fader agrees dynamic pricing involves a great deal of sophistication. "You have to have a fundamental understanding of your customer dynamics and how they might vary across customer groups, across industries and over time." It can also be expensive and time-consuming for growing businesses to implement--especially if price isn't as important to customers as other factors, such as service, selection, quality and convenience.

If you want to experiment with personalized pricing, start small by creating e-mail coupons featuring different discounts to different customers.

Melissa Campanelli is a marketing and technology writer in New York City.