Rafi Mohammed

Should Internet Retailers Discriminate Against Customers?

Posted on July 10th, 2012 (0 Comments)

Reprinted from the Harvard Business Review website.

Last week the Wall Street Journal reported a bit of pricing news that seemed downright shocking: After the travel website Orbitz recognized that people who access its site using Macs spent as much as 30% more on hotels than PC users, it began to take advantage of the insight, rigging its search engine to routinely show Mac users a ritzier selection of hotels than customers using a PC.

To be clear, all Orbitz users can see the same hotels if they opt to view hotels by price, and Orbitz does not charge different prices for the same room based on what kind of computer you use. Still, as pricing strategies go, this one is an attention grabber.

It's also a strategy that makes sense. All stores — both online and physical — should tailor offerings to their purchasing segments. In an online environment, that might mean offering different choices to customers based on their purchase history or the kinds of products they've clicked on in the past.

This type of segmentation is tried-and-true in the brick and mortar world. Customers at a hardware store in Beverly Hills are likely to buy different products compared to those in less affluent areas, for instance. This is why product selections for individual stores in a nationwide chain often differ by location. Similarly, customers who inquire about high-end products are likely to have different tastes and budgets than the norm, and be shown different sets of products. Banter with customers provides clues on which products a sales person should feature. Finally, B2B sales forces may elect to only offer some products to specific segments — not to everyone.

Offering tailored selections is win-win. Customers benefit from more efficient shopping experiences and satisfaction that their needs are being well-served. Companies win by attracting, and profiting from, customers with differing price sensitivities — ranging from "I want the cheapest" to "money is no object."

So if online retailers can identify customers with different price sensitivities, why not charge different prices by customer type? After all, this is commonly done in the brick and mortar world. Retailers often set different prices in different locations. Target has acknowledged using this practice based on the level of competition at each location: If many rivals are close by, prices are lower, but if it's the only game in town, prices are higher. Gas stations routinely charge different prices at different locations. Similarly, it's customary to negotiate for certain types of products and services, so the price that anyone pays for, say, a car will vary based on product knowledge and negotiating skill.

Even so, it would be a big mistake for online retailers to charge different prices to different customers. Why can brick and mortar companies "get away" with this practice but online retailers can't? Let me suggest two reasons. First, it's not widely known that retailers adjust prices by location, and even if customers notice it, they can probably justify the difference based on geography. ("It must cost more to operate here.") Second, while negotiation is often disliked, customers accept this practice because it's the way prices have always been set.

The situation is different for online retailers. Locational cost can't be used to justify different prices, nor is negotiation the norm in online shopping. I have no doubt an online retailer could boost short-term profits by utilizing a customer's purchase history and other personal data to raise or lower prices. But over time, these practices will become public, and customers may feel cheated. Companies need to remember that pricing moves that feel like common sense to managers can feel like a raw deal to angry consumers. Remember Netflix?

The bottom line is that all retailers should offer different product selections based on a segment's interests and willingness to pay. And while it's rare for bricks and mortar stores to have a pricing advantage, they have unique opportunities to offer different prices to different customers that their online brethren should not attempt to match.

So what do you think? Should all companies adopt the Orbitz product segmentation strategy? Should online retailers set different prices to different customers? I'd love to hear your thoughts.

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