Personalized Pricing Pits Profit Against Privacy

Watch more: Personalized Pricing: Smart Strategy or Scary Surveillance?

Delta Air Lines ’ July disclosure of using personalized pricing , or when the amount an individual pays is determined by their personal information, is reigniting an old debate.

How far can businesses go when it comes to charging customers differing prices for the same product or service?

Differentiated pricing is not a new concept. Student and senior discounts are familiar examples of consumers paying different prices for the same goods, based on broad characteristics. Personalized or surveillance pricing takes it further by looking at an individual’s unique information.

“It’s a form of price discrimination, which is not the greatest phrase in economics, but it’s a phrase that we use often, which is the idea that prices are tailored to a group or even an individual based off of their characteristics,” John M. Yun , associate professor of law at the George Mason University Antonin Scalia Law School , told Competition Policy International (CPI), a PYMNTS company, in an interview. “These characteristics could be your location, it could be that you’re a college student, or that you’re a senior citizen.”

But what’s different about personalized pricing from other types of price discrimination is that disclosure of personal facts is not voluntary but rather inferred, Yun said. Instead of a customer opting to share their status with a merchant, the information is deduced from the individual’s unique online activity, device, location or purchase history, and the price is set based on those factors.

Personalized pricing isn’t the same as dynamic pricing or product steering, Yun said. Dynamic pricing changes for market-wide factors, such as supply and demand, like when airfares become more expensive during holidays. Personal characteristics, such as whether the customer is a Mac or PC user, are not considered.

Product steering is yet another cousin of personalized pricing. This refers to varying the products displayed based on the customer’s profile. In 2012, Mac users looking for hotels were served higher-end lodging by Orbitz due to the finding that Mac users tended to pick higher-priced hotels, Yun said. All saw the same prices; Mac users just got upscale choices.

While both product steering and personalized pricing take personal information into account, product steering doesn’t change the prices. Personalized pricing does, according to Yun, who wrote the paper “Should We Fear Personalized Pricing?” in the July CPI Antitrust Chronicle .

Tailoring the Price to Fit the Customer

In 2019, Target caused a stir when journalists discovered that the price of a television would drop by $100 when browsing online away from the store versus in Target’s parking lot. The retailer said the difference was due to in-store and online pricing being different, but the revelation that Target took location into account unsettled customers.

“It’s a consumer’s right to be upset or not upset,” Yun said. However, “really good, personalized pricing” policies try to determine customers’ willingness to pay, whether higher or lower, by knowing them deeply.

“That’s really at the heart of this,” Yun added. “Why do students get discounts? Because they generally have less wealth than adults, so they need a lower price in order to incentivize them to participate in the market. Your willingness to pay actually may be relatively low, and if they know that, they can actually tailor the price to be better for you.”

What the uproar may truly be about is the invasion of privacy.

“I’ll identify if I’m a student or a senior, or I live in D.C., but don’t do it based off of just data that you’re collecting about me when I’m online,” Yun said. “It’s a privacy violation, and I don’t want to worry that I’m paying a high or even a lower price one day compared to my neighbor.”

The Future of Personalized Pricing

The market will ultimately determine whether personalized pricing will be acceptable to consumers, Yun said. In the meantime, companies that do not practice personalized pricing are loudly saying so. For instance, following the firestorm of Delta’s disclosures, American Airlines CEO Robert Isom quickly slammed the practice as trickery .

From an economist’s perspective, it makes sense for a company to maximize its profitability through personalized pricing, Yun said. But he also pointed to three factors that could hamper its adoption widely. First is consumer acceptance, or lack of it. Second, competitive pressures. If one retailer offers personalized prices but its rivals do not, the latter can lure away customers who don’t like the practice.

Third is “this sense of a stigma” that will lead to “attacks on companies that do this,” Yun said. For example, Uber was accused of charging a rider a different price if they knew the person’s smartphone battery was low and the person would be more desperate to book a ride.

“They were very quick to say, ‘No, that’s not what we’re doing,’” Yun said.

As to whether personalized pricing is good or bad, there’s no clear-cut answer. Over a lifetime, the same person could benefit and also suffer from this tactic, gaining when young and cash-strapped, losing when older and less price-sensitive, he said. And results differ by market.

Even without personalized pricing, companies use dynamic pricing, targeted discounts and product steering. Current laws can deal with unfair pricing if personalized pricing becomes a widespread problem.

What has caught the attention of antitrust authorities is a company obtaining a competitor’s pricing information through an algorithm to set its own prices, Yun said. That’s what happened to RealPage , whose technology was used by landlords. The company is being sued by the United States government for alleged antitrust violations. This is not about personalized pricing per se.

“It’s a different problem,” but related, Yun said.

When asked directly whether consumers need to fear personalized pricing, Yun quipped about rebranding it “bespoke pricing” but said it wouldn’t address the underlying issues. The core concerns remain how much information is gathered, how transparently it is used, and whether consumers can make informed choices about these pricing practices.

“Ultimately, information is the key,” Yun said. “Do consumers have enough information to make a disciplined and informed choice about companies and brands that engage in a certain pricing practice?” In this sense, consumers should be concerned about personalized pricing, “but concerned doesn’t mean this is unilaterally bad.”