How to make personalized pricing work | Business Today

With so much benefit for the consumers why is there so much consumer and regulatory backlash against the new-age companies for their pricing strategies? It is to do with the lack of trust. In the process of haggling the consumers are involved in the price formation process face-to-face and settle at what both sides agree as a fair price. When technology enables companies to do the discriminatory pricing, it does not directly involve consumers.  As a result, consumers perceive the prices they are asked to pay by a dominant seller as unfair. It is not clear to them how prices are formed.

Amazon had realized this as early as in 2000 when it abandoned the strategy of explicitly charging different prices for the same product and refunded money to thousands of customers after a DVD was sold this way. Even now, rather than risk stirring up consumer resentment by explicit price discrimination, Amazon and a number of other companies including Uber achieve price discrimination via more traditional ways of discounts and mega sales.

Adverse consumer reactions are also inevitable when prices can be jacked up unfairly. For example, if Uber drivers log out of the system in a coordinated matter it artificially creates a supply shortage causing a surge price.  In years to come, with driverless cars becoming a reality a different form of pay-as-you-go pricing model will come up. Even this will have to be perceived as fair by consumers.

Even more serious unintended consequences can arise with a price strategy such as a ‘route-based pricing’ whereby trips from more prosperous areas are charged at a higher price. The Princeton Review, an online tutoring provider, prices its SAT course differently in different ZIP codes across the United States. It has been reported that with such a policy, less well-off Asians were likely to be charged a higher price than relatively rich non-Asians. This is because ZIP code pricing captured a lot of low-income Asian dominated areas along with lot of high-income areas.

With an ever increasing dominance of a few large tech companies, even if the technology allows a possibility of perfect price discrimination, consumer perceptions of price fairness will be the key to its sustainability. Perhaps, its now time again to involve consumers, at least to some extent, in the price setting mechanism. Technology can surely find a way out.

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How to make personalized pricing work- Business News.