Online businesses often use personalized pricing strategies to entice new customers to buy but at the detriment to loyal customers who simply get offered the standard price. According to research in the International Journal of Networking and Virtual Organisations, which has examined market dynamics in this context, there is a complex interplay between suppliers, retailers, and customers. In the world of pricing and advertising competition, dominant and weaker retailers could do well to understand the pros and cons of their strategies in terms of their bottom line.
Biao Ma and Li Li of Nanjing University of Science and Technology in Jiangsu Province, China have found that dominant retailers consistently opt for unified pricing, a fixed strategy, while weaker retailers employ personalized pricing when it is cost-effective and only use unified pricing when they perceive it not to be. Weaker retailers generally imagine that personalised pricing will lead to greater profits.
Historically, dominant retailers with significant market power, can, of course, secure products at lower wholesale cost, when compared with the prices at which weaker retailers are able to buy their stock. The fundamental issue is that the smaller retailer simply lacks bargaining power and cannot compete on its offering to consumers without turning to personalized pricing strategies, a strategy facilitated by e-commerce.
The perception is that a personalized pricing strategy draws in new customers without alienating loyal customers, although wily consumers will be well aware that retailers use this approach to price and may be deterred from sticking with a retailer if they feel they are being duped or can get a better deal elsewhere.
The new study builds a model to look at how pricing and advertising competition guide retailer decision-making and ultimately the profits they make. The model challenges the assumption that personalized pricing universally benefits retailers, highlighting that intense price competition actually favours their suppliers. Moreover, it becomes obvious from the work that information technology can shape personalized pricing but does not necessarily control the effectiveness of personalised pricing strategies across markets. The work emphasises the importance of recognizing asymmetric markets, where dominant retailers embrace unified pricing, and weaker retailers flip between personalized and unified pricing.
Ma, B. and Li, L. (2023) ‘Who can profit from personalised pricing – supplier, retailers, or consumers?’, Int. J. Networking and Virtual Organisations, Vol. 29, No. 2, pp.183–210.