Dynamic vs. Personalized Pricing
Two pricing topics have garnered a lot of interest in retail over the last year or two: dynamic pricing, and personalized prices. Sometimes I even hear people use them interchangeably, though I would strenuously argue they are not the same thing.
Here are my definitions. In dynamic pricing, the price changes basically according to variables that are specifically NOT customer-related. Dynamic pricing cares more about the time of day, or the available supply, or maybe, just maybe, the volume of traffic to a product detail page. It may care about competitors’ prices, and it might also consider competitors’ availability. But as far as who the customer is and whether she is a valuable lifetime customer to the retailer, dynamic pricing doesn’t care. The price may change, but everyone will see that price no matter who they are, so long as they are on the product detail page at the same time.
In personalized prices, it’s the exact opposite. It is entirely about who the customer is and what the retailer is trying to incent the customer to do. A highly loyal, high value customer may receive an offer that nets a substantially different price than a cherry-picking unknown customer who has no history with the retailer. There is the price on the page or on the shelf, and then there is “your” price – the unique offer you received.
Personalized pricing does not mean you need to know everything there is about a customer, or even her name or email address. If an unknown shopper comes back to a shopping cart item five times but hasn’t purchased, an offer to knock 10% off the price – just for that shopper that one time – may net a purchase that might otherwise have been lost. In the same way, if the shopper is known, a low-value shopper who hasn’t demonstrated much loyalty may not receive that little extra incentive while a high-value, loyal shopper just might. Those offers are personalized – offered only to that one person in that one circumstance, based on who the shopper is or at the very least, an assessment of her behavior and how to influence that behavior. And they are not offers that are made to everyone, for all to see.
Both types of pricing, dynamic and personalized, require a large degree of sophistication and access to a lot of real-time data. I suspect that is why they are often confused, because the decisions that are made to change a dynamic price (for all to see) vs. a personal offer (for one at a time to see), are basically the same math. The difference is just in the inputs. One is customer-centric (personalization), and the other is not (dynamic pricing).
Retailers, it appears, have decided that dynamic pricing is on the out. In our newest benchmark report on pricing, we found that 28% of respondents saw dynamic pricing as an opportunity in 2016, while only 22% agreed it was an opportunity in 2017. In the meantime, the opportunity inherent in personalized offers crept up from 31% in 2016 to 33% in 2017.
If dynamic pricing is out and personalized offers are in, why wasn’t there a greater uptick in retailers who see personalized offers as an opportunity? That answer is easy: they fear consumer reaction. If offers go from totally irrelevant to suddenly wholly relevant, retailers fear that consumers will get creeped out. Consumers know that retailers collect their data, but so far retailers haven’t done much with it, especially in personalizing offers. If retailers just flip a switch and turn personalized offers on, they risk consumers noticing just how much retailers know about them and deciding that, whether they get better offers as a result or not, they don’t like it.
The end result is that while retailers do actually see a lot of opportunity to develop more personalized prices, they also have to be careful and take a slow and steady approach to introducing personalized offers. We asked consumers what they thought about all of this, and we’ll have a lot more to say about that in the future – so stay tuned. In fact, make sure your account settings on our site are set to subscribe to pricing updates from us, so you’ll be the first to know when our new he said/she said comparisons of consumers and retailers publishes.