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The new pricing playground
Retailers increasingly make use of differentiated prices in forms of coupons, sales promotions, and personalized offers. Especially in multichannel retailing it has become common practice to differentiate prices according to touchpoints or across online and offline channels. For example, prices for identical products are often lower on price comparison sites than when accessing the shop directly via its URL. Price differentiation comes in different forms. In general, retailers may charge different prices according to customer segments and/or sales channels as well as dynamically over time, or a combination of both (Figure 1).

With the growing availability of behavioral consumer data from online browsing and purchasing, businesses can even tailor product prices to consumers’ individual willingness-to-pay. Simulations show that profit uplifts are much higher when such data is used compared to traditional consumer metrics like demographics. Besides, automated algorithms have made the implementation of pricing measures much cheaper and easier. It is thus not surprising that many companies are jumping on the bandwagon by experimenting with various forms of price differentiation.

Digitalization works both ways
However, the same advances that enhance retailing’s options to leverage price have also been a blessing for consumers. Price transparency at near zero search costs not only affects their sensitivity towards product prices but makes fencing – the supplier’s attempt to shield consumer groups with different prices for the same or similar offers from each other – a difficult endeavor. Nowadays, betting on consumers’ lack of awareness or even ignorance towards price differences does not seem like a sustainable strategy. In fact, our representative survey among German customers across three large product categories suggests that an overwhelming majority (91 %) obtained information about price ranges of the desired product prior to their purchase. Over 40 % even confirmed very accurate price knowledge. This transparency paired with awareness of companies’ differentiation practices makes consumers highly alert and sensitive to price changes, placing tight boundaries around overt differentiation schemes. We exposed over 2,000 German consumers to different forms of retail price differentiation in a large-scale experiment to empirically analyze how they react.

How consumers identify and evaluate the fairness of differentiated prices
Even if both, companies and consumers, can benefit from price differentiation, consumers identifying these practices may feel discriminated. Our study showed that independent of whether consumers benefitted from a pricing scheme,74.8 % of consumers across six price differentiation schemes considered the shown difference as unfair. Among the beneficiaries, this number dropped only slightly to 65.2 %. This is likely because consumers may fear that a price differentiation scheme might be turned against them another time. To what extent consumers perceive price differentiation as fair or unfair depends on several criteria and on the types of price differentiation measures a company implements. Figure 2 summarizes the impact the different criteria have on trust in a retailer.

How similar is the purchase situation?
The less similar the purchase situation is, the less likely a different price is considered unfair. For example, a company can offer a basic, and a premium version of the same good. Additional services or features added to products, or different distribution channels reduce the perceived similarity. Also, the timing of price differentiation plays a role. From the consumer’s viewpoint, it makes a difference whether, e.g. an available coupon expired just the day before or the last promotion was several months ago. If the difference is clear, offers tend to be classified as separate and not as a form of pure price differentiation. Overall, the dissimilarity of offers has a high impact on trust.

Can I decide which price to pay?
If a good deal is accessible through extended search or other consumer action, consumers have some degree of control over the price they pay. Price-sensitive consumers are likely to incur greater effort and time to receive a good price, while less sensitive consumers may accept the higher price without much complaining when, for example, they need a product urgently or have little time. Our study showed that consumers who have more control, e.g., when they can use coupons or use a specific channel, their attitude and loyalty towards the retailer improves. However, more control by itself has a smaller effect on perceptions of fairness and behavioral consequences than other criteria. It seems, that consumers do not only base the evaluation on their own advantage, but also consider the effects on disadvantaged consumers. A feeling of solidarity with less knowledgeable people may induce a feeling of rejection towards the retailer and reduce the overall positive influence of control on trust.  

Why did my neighbor get a better price than me?
The perceived implicit or explicit rule underlying the price differentiation scheme influences its evaluation as well as behavioral reactions. Price differentiation is perceived as more fair and has less dire consequences if people see good reasons for it. Examples for relatively fair pricing rules are discounts for children or senior citizens and quantity rebates, as larger quantities allow companies to incur lower margins per item sold.

Does the retailer differentiate for pure profit maximization or for “more reasonable” motives?
Lastly and linked to the pricing rule, consumers make inferences about the retailer’s motive behind price differentiation. If retailers charge different prices based on cost or performance differences, consumers will be more understanding. This holds also for differences between stationary and digital retailing. Figure 2 shows that the suspected motive of the retailer had the strongest positive association with trust among all tested criteria. Customers do grant companies a certain profit margin as long as they don’t feel cheated.

Knowing how to play the game
In addition to these general observations, our study also revealed considerable heterogeneity among participants, suggesting different segments based on reactions towards price differentiation. Some participants – making up a substantial portion (27 %) of the market – stand out through significantly more positive reactions towards price differentiation than the rest. This group is particularly well-informed about prices through online channels, leading to increased confidence about their own price expertise and skill to find the best deal (see segment 1 in Figure 3). Obviously, consumers who know how to maneuver through the pricing jungle and are able to land on the “right” side of the spectrum are not as much repelled by differentiation practices. It is therefore reasonable to assume that success in terms of “scoring good deals” plays a significant role in the evaluation of differentiated prices.

These assumptions are backed by an analysis of industries in which price differentiation has been common practice for quite some time. For instance, consumers of gas stations find dynamic prices over time – especially within the same day– just as unfair as for any other industry, if they perceive to have been disadvantaged. However, once they profit from the practice, their assessment is significantly more positive than of the same practice in categories like sneakers, perfume, or consumer electronics. We explain this asymmetry by a combination of learned “pricing skills” and control over the final price: Gasoline customers often know the patterns according to which prices fluctuate throughout the day or week. Hence, they can predict and “choose” to get good deals. Their price success lies, at least in part, in their own hands, which lets differentiation schemes shine in a more positive light. Furthermore, others can easily benefit as well, because fluctuating prices are common knowledge and striking a bargain does not require special skills or expertise. Therefore, the rejection based on unfair discrimination of others is low. It is only when consumers feel helplessly at the mercy of the situation – or perceive that others might– that they strongly reject differentiated prices.