Why Differential Pricing Might Actually Be a Good Thing

Pricing

  • What’s the Price? That Depends: Who’s asking?
  • Differential Pricing & Consumer Rights
  • The Case for Differential Pricing
  • What About Discrimination?
  • What About Deceptive Business Practices?
  • Who’s Right about Differential Pricing?

What’s the Price? That Depends: Who’s Asking?

There used to be a bar in a town that I will leave unnamed, somewhere in the USA, called Uptown. The bar was run by a first-generation immigrant named Ania who had a thick Polish accent and was concerned that the government was out to get her – to the point that she would often accuse customers of being federal spies. You could say that Ania’s standout feature was this conspiratorial paranoia; she distrusted structure so passionately that she didn’t want her behavior to be predictable.

Therefore, she charged everyone who came up to the counter a different price for their beer. To a person, people always had a strong reaction to that. They either thought it was “genius” or that it was offensive and unfair.

Fast-forward to 2015, and we see the issue of differential pricing dominating big data conversations. In Washington, DC, it’s front and center for the tech industry, a hot area of political debate.

Differential Pricing & Consumer Rights

People who are unsure about the big data movement don’t like the idea that businesses could optimize the ability to differentially price, charging one price to one person and another to the next (possibly adjusting based on factors such as perceived income and perceived need – although the list goes on).

“[Differential pricing] has been around for years in various forms, such as when stores offer student discounts or when airlines charge more for tickets closer to departure dates,” explains policy analyst Josh New. “[B]ut many more companies now have access to granular data that could allow them to set prices at the individual level.”

Representing the Center for Data Innovation, New takes a stance that differential pricing is essentially positive. His basic argument is outlined below.

The Case for Differential Pricing

Everyone is still learning about differential pricing, and it’s a key angle for technology businesses to help clients with big data projects and outwit their competition; so research is ongoing. The White House analyzed differential pricing and determined that it would not lead to higher incidence of fraud or discrimination but instead be financially beneficial both to e-commerce and to individuals.

People who think that these big data initiatives will only drive prices higher cannot back up their claims, says New.

“While the goal of differential pricing is of course to align prices with what customers are willing to pay, companies still must keep prices competitive to retain the business of cost-conscious customers,” he argues. “Better understanding how customers value certain items actually can lead to market expansion and increased engagement.”

Since social media and online transactions are so commonplace, it’s become less expensive for businesses to gather specific profiles and preferences to accurately predict user behavior and perceived valuation. In this way, big data allows for the customization of marketing with highly flexible retargeting efforts and data-driven differential pricing. Is that a bad thing? Some think so.

The idea that it’s sinister is deflated when you remember that customers still have access to the rest of the Internet, New suggests. “[M]ore data … empowers consumers and enhances competition, thereby protecting against exploitative pricing,” he says. “Any company offering a customer a higher price … would quickly lose market share to competitors … with lower prices.”

What About Discrimination?

There are two basic protections in place against discriminatory differential pricing: free market competition and federal law. If a company is found to be pricing differentially based on race and ethnicity, anyone who finds that objectionable will take their business elsewhere. Additionally, the Fair Credit Reporting Act and the Civil Rights Act both make it illegal to discriminate against consumers through any means.

What About Deceptive Business Practices?

Differential pricing is not problematic if it is performed legally, in the absence of discrimination and in a manner that is not intended to defraud consumers, posits New. He backs off from his argument for the big data strategy, though, to explain that some businesses could actually exploit analytics to make transactions intentionally complex, cloaking the true cost of what they’re selling.

“When buyers cannot easily understand or compare prices in the marketplace, a competitive market no longer offers consumers strong protection against inequitable use of differential pricing,” says New. “In such cases, policymakers should … focus on making markets more competitive and transparent instead of needlessly sacrificing the benefits of differential pricing.”

The report issued by the White House, called “Big Data and Differential Pricing” (released February 2015), agrees essentially with New’s assessment that the method is not itself problematic. Instead of outlawing it, the leadership should look at the real issue – which is often limited informational access or poor local competition – rather than stopping companies from leveraging big data to fine-tune their approach, New concludes.

Who’s Right About Differential Pricing?

New makes a good case for differential pricing, but this article isn’t intended to concur 100% with his position. However, we should certainly be able to agree that it isn’t always a bad thing. After all, take this example: those of us who are tech-savvy can take advantage of geographical differential pricing schemes by creating and browsing with cloud virtual machines from disparate areas.

Plus, you may be able to increase profits at your company by creating a big data project to explore possibilities with differential pricing. For that initiative, you need strong cloud hosting. With Superb Internet, you are guaranteed the total PassMark performance per core that’s indicated with your plan. That PassMark rating is important because it’s the only practical and objective comparison of the actual CPU of different systems (since using GHz to measure microprocessor speed is meaningless with various CPU generations).

By Kent Roberts

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