Loyalty+Coupons = Positive Price Discrimination

I was at a conference last week where the speaker was from the gaming industry and touched upon the topic of price discrimination - where essentially a customer is given a unique price based on both their price elasticity and potential value.

The thinking was that given a casino hotel gets near 100% occupancy, isn't it better to fill rooms based on the total potential value of a customer (i.e. including how much they might spend in the casino), rather than just look at the margin on the room itself.  In that scenario, if a lower value customer wants a room then you can simply price the room higher for them to ensure you get the same overall margin return from the customer (and the room).

Price discrimination is a really interesting concept and one most retailers would love - being able to price items individually based on what a customer is prepared to pay for the item - in essence maximising reach and margins.

This practice is quite common in some industries today such as airlines and hotels through yield management strategies and results in customers self selecting whether they are prepared to pay that price or not.  However this still isn't personalised pricing based on the profile of the customer.

A recent blog article discussed the topic of price discrimination and highlighted two recent studies into the practice that found no real evidence that it was happening in online retail - at least not on a per customer basis.

One of the reasons for this is that price discrimination can create negative publicity.   It doesn't seem fair if two different customers pay different prices for the same item, simply because one is "willing" to pay more for it.  There has been no additional value provided and from the customers perspective, no additional costs incurred for delivering it.

In fact, in the US, where retailer Staples was highlighted as using price discrimination based largely on a customers proximity to a competitors store, the customers affected said "I think it's very discriminatory", questioning, "How can they get away with that?".

Ways around this are to keep the headline price fixed and vary benefits and offers instead.  Coupons for example provide a means for retailers and manufactures to lower the price for those customers who are sensitive to it and yet maintain the premium for those who are not.

Loyalty points are obviously another key mechanic in positive price discrimination in that the same price is paid for the goods, but customers are given different levels of deferred discount as expressed through loyalty points depending on their membership of the programme and potentially their tier.

From a customer perspective, loyalty points are not seen as a cost or as part of the price they pay, they are seen as a reward.  I could pay the same price for the same item as another customer, but I wouldn't typically complain if the other customer earned double points on that purchase.

Increasingly though, where real value can be achieved for a retailer is through a combination of loyalty and coupons.  Using customer purchase behaviour derived from the loyalty programme allows for targeted couponing to reward and shift individual consumer behaviour.

The sticker price stays the same, but price discrimination on a customer by customer basis is alive and kicking.

As recent article in Forbes magazine discussed the emergence of individualised coupons and how they enable price discrimination saying:-

"Coupons are psychological, and that’s why they succeed so much. They are designed for the store’s benefit in profit, but they achieve this by making the customer feel good about the price they “scored.” [...]  With individualized coupons, we’re allowing stores to use personal transaction data to make us feel good, in an attempt to subtly modify our spending behavior for the store’s profit"

For ecnomists, price discrimination creates an almost perfect market where every customer gets the product they want for the price they feel it is worth.  There is nothing wrong with treating different customers differently and there is nothing wrong with recognising those customers who add more value to your business.

Whilst nothing is perfect and some would argue that rewarding one group is done at the expense of another, using loyalty in combination with targeted offers provides a powerful way for retailers to maximise margins, recognise customers and change consumer behaviour.  

Personalised pricing just got a lot easier to implement and loyalty is right at the heart of it!