Price Discrimination in Online Shopping

Pablo Valerio, International Business & IT Consultant | 5/2/2013 | 27 comments

Pablo Valerio

Every grocery shopper knows that supermarket chains have been applying "zoning" for many years, and there is a significant price difference depending where you shop.

But online retailers, including Amazon, Best Buy, and Staples, and travel sites such as Orbitz, are increasingly using sophisticated analytics to price the same product or service differently depending who you are and where you live.

Except for advertised prices, people living in more expensive neighborhoods will pay higher prices for the same products unless the presence of cheaper competitors makes chains change their offers. While such discrimination can be frustrating for customers, it allows retailers to compensate for lost revenue when they need to liquidate stock and/or compete in certain locations, allowing them to stay in business. Some brick-and-mortar retailers with online shopping sites use price by location to be able to compete locally. For instance, one might see higher prices at a Staples in Harvard Square in Cambridge, Mass., than the same retailer in Somerville, just three miles away.

Tests conducted by journalists from Wall Street Journal demonstrated that priced a basic Swingline stapler depending on the zip code of the customer. There were differences up to 10.5 percent. Users in price-sensitive areas and others where Staples has more direct competitors received lower prices.

A study from the Universitat Politecnica de Catalunya and Telefonica detected several methods used by retailers to differentiate potential customers and set different prices, such as combination of browser/OS, type of technology (tablet or smartphone) used to make a purchase, location, and personal information.

Search discrimination is another way to get more revenue from potential buyers. Search engines, knowing the user's history, display more expensive choices to users looking for a specific category instead of a single product. Two users looking for hotels in the same city, for the same dates, can get different choices depending on their location and search history. Booking sites make money on commissions paid by hotels, airlines, and other travel services and it is in their interest to get people to choose the most expensive choices.

Of course, there are two sides of the story. Those price differences can help some people get the service they want. The fact that some airline passengers pay a higher price for the same seats means that other people can afford traveling by plane.

Should CIOs help make price discrimination a reality? It depends on your potential market. I think it would be easier from a technical point of view, and less likely to create an angry customer, to offer special discount coupons to online shoppers instead of displaying different prices. Also, it is very important to keep existing customers happy by offering them the best deals.

As price discrimination grows, and price comparison becomes easier, discriminated customers may choose to go elsewhere. Still, used sparingly and with the right product mix, it could become another excellent tool to provide your CMO. If nothing else, to apply the tool, you need to know your customer and their habits better than you might know them now.

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