Companies use artificial intelligence to increase profits by charging different prices for the same product or service. They offer lower prices to some customers and higher prices to others. This strategy is part of variable pricing. Let’s take a look at the pros and cons of this AI-based pricing approach.

Companies gather consumer data when users share their location, activity, status, or other information on social media. They also track shopping habits and have access to browsing history. All of this data is analyzed by AI and machine learning algorithms to create digital profiles. Based on these profiles, algorithms can determine how much an individual is likely to pay for a product or service. And this is known as personalized pricing.

(It is vital to note that variable pricing is different from variable cost-based pricing. The latter involves adjusting prices based on changes in costs such as labor, distribution, packaging, and materials.)

Variable Pricing Has Been Around for Decades

AI has empowered personalized pricing. However, the concept is not new. In nearly every industry, businesses offer discounts to select consumers while others pay full price.

For instance, tourists are often charged higher prices than locals at popular destinations. Car dealerships used to sell vehicles at different prices to different customers until auto manufacturers began listing prices online.

In the corporate world, airlines were among the first to implement varied pricing on a large scale. On a single flight, passengers often pay different ticket prices for the same destination. Airlines use algorithms to adjust prices based on factors like the number of seats sold, flight dates, and schedules. Similar pricing strategies apply to tickets for sports events, hotels, and concerts.

Charter Communications provides another good case study. The American broadband giant allegedly practiced price variation. According to a study by the California Community Foundation, Charter offered lower prices in high-income neighborhoods. In contrast, areas with lower incomes and housing values, particularly in parts of Los Angeles, saw higher online prices—a striking case of price discrimination noted in 2022. Additionally, internet speeds varied depending on location and local demographics, with the company capitalizing on varying levels of willingness to pay.

Beyond locality, companies also engage in device-based price discrimination, or dynamic pricing. Product or service prices may change based on browsing history, location, and device type. Studies show that iOS users, often considered part of a higher-income demographic, tend to see higher prices, as they are assumed to have a greater willingness to pay.

Related: Are ride-hailing apps charging iPhone users more than Android users for the same ride? In other words, are iPhone users charged more for everything? Here’s what Brut found.

Dynamic Pricing Advantages and Disadvantages

How Can Personalized Pricing Benefit Companies?

Businesses strive to maximize revenue from consumers. Some shoppers are willing to pay a premium, while others seek discounts. Personalized pricing allows brands to offer products or services at prices tailored to each buyer’s willingness to pay, thus boosting overall sales and profits.

There is another side to this. Some brands prefer a single price for all customers. But why? First of all, shoppers lose trust and loyalty when they discover that others are receiving better deals despite similar purchasing histories. Secondly, they may feel unfairly treated. Varying prices can also create challenges for back-end teams and customer service representatives. Competition is another consideration. Competitors can exploit price differences by offering lower rates to attract customers.

In India, cab booking apps Ola and Uber recently attracted attention for charging higher fares to iOS device users compared to Android ones. Both apps have attracted ire from users on X and Facebook. Consumers in the West have something similar to say about Shopify variable pricing, Uber variable pricing, and dynamic pricing implemented by Airbnb. It goes without saying that their brand reputation has gone for a toss. Lastly, price discrimination may lead to legal challenges for businesses. To conclude, these factors can harm a brand’s reputation.

Is personalized pricing favorable from a consumer’s point of view?

Varied pricing does not promote consumer welfare. Here are four points that elaborate how and why.

1. Collecting and using customer data leads to an invasion of privacy.
2. Personalized pricing means companies will charge the maximum that shoppers might be willing to pay.
3. Consumers end up being overcharged.
4. Discrimination based on income, location, or browsing habits may result in vulnerable groups paying more.

Legal Challenges

In most countries, personalized promotions, variable, and dynamic pricing are not considered as a basis for intervention. However, agencies in the U.S are investigating if variable pricing hurts rural customers and women. In the UK, the Competition and Markets Authority is investigating the dynamic pricing strategy implemented by Ticketmaster while selling concert tickets. In India, the government is investigating the pricing strategy used by BookMyShow for selling Coldplay concert tickets. Put simply, regulations are different in every country. Thus, variable pricing strategies cannot become commonplace.

Long Story Short:

To sum it up, it wouldn’t be wrong to suggest that variable pricing is a curse for consumers. From a business perspective, it also proves to be a slow poison in the long run for brands.

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