A new study examines why personalized pricing tactics are perilous to businesses. What it implies is that many of these practices are not actually producing the profits they think they are counting on. Yan Xiong (right) and his team performed the research. Their research was published in the Journal of Economic Theory and demonstrated that by implementing transparency in pricing, one can increase sales.
Liyan Yang, an assistant finance professor at the University of Toronto’s Rotman School of Management, the Peter L. Mitchelson/SIT Investment Associates Foundation Chair in Investment Strategy. He noted that low, transparent prices bring more consumers into the market and expand purchasing. This detail runs counter to the conventional wisdom surrounding personalized pricing. It demonstrates that withholding the most basic price information can have a demonstrably powerful effect on consumer purchasing behavior.
The Dynamics of Personalized Pricing
Personalized pricing wouldn’t need to discriminate against black or brown people at the point of sale. This practice often occurs in industries such as travel and retail, in which some airlines use AI to individually tailor airfares. That trend is moving fast. This is in part because of the ridiculous success of “Buy Now, Pay Later” schemes, pairing products with subsidized debt.
Though becoming increasingly common, Yang’s research shows that an emphasis on personalized pricing can backfire. Unfortunately, by restricting price transparency, companies could unintentionally scare off interested buyers. The study points out an alarming reality—when consumers lack crucial price information, they frequently choose not to purchase at all. This single decision may greatly reduce sales by the total number of sales.
Additionally, firms often resist regulation out of concern that it will limit their ability to implement a price-discriminatory strategy. Yang’s argument is that imposing price controls could, in a twisted way, make corporations more profitable. China, EU member states, and the US are all working to implement strategies to curb the harmful use of personalized pricing. Their hope is that this will lead to a more equitable, inclusive process for all.
Implications for Corporate Strategy
Yang’s thoughts prompt some key questions regarding where companies should be focusing their pricing efforts. The research proves that personalized pricing can maximally cater to consumer preferences in a highly entrepreneurial way. It risks alienating broader customer segments. When prices are fixed and known to all, producers compete on volume and sales increase. Consumers feel more confident in their purchasing decisions, resulting in higher basket sizes.
This new direction toward transparency will likely change how corporations plan their strategies in the future. Businesses should reconsider their dependence on sophisticated pricing algorithms that customize prices for each consumer. Rather, an emphasis on simple, low upfront cost might work out better in bringing a broader swath of Americans into the EV fold.
This is what Yang gets right about a critical conversation. Even if personalized pricing sounds good in principle, it often leads to consumers paying more money just with a less transparent breakdown. Looking ahead, businesses are playing a high-stakes game of chess. They will need to deeply consider the tradeoffs of increased customization vs reduced consumer spend and/or decreased sales volume.
Regulatory Perspectives and Future Considerations
The discussion about personalized pricing is made even more complex by regulatory issues. Governments in Australia, Europe, and the U.S. are considering actions to prevent companies from offering one price for some customers and another price for others. This type of approach seeks to insulate consumers from harmful practices and ensure a more even competitive playing field exists in the market.
Yang’s study highlights that it’s more critical than ever to understand how price transparency influences purchasing behavior. In short, some companies push back on regulatory progress when they’re scared of the threats that upset their profit margins. Though challenging to adopt, consistent pricing practices provide the opportunity to foster deep consumer trust and loyalty over time.