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The Relationship between Personalization and Pricing

By Edited Jun 11, 2014 0 0

     The primary goal of personalization is to build a deeper connection with customers to capture customer loyalty and increase profit margins.  This article discusses the benefits of personalized marketing and the relationship to product pricing.

Personalization

      Marketers are seeking to use personalization as a method of increasing the return on their marketing investments. The main challenge of personalization, from a marketing viewpoint, is the lack of a common framework through which consumers and marketers can communicate. Research on the subject of personalization has revealed consumers had seven different interpretations when comparing and contrasting the differences between personalization and customization.

     Common views of personalization range from where personalization is a specialized form of product differentiation tailored to a specific person to a view where personalization  initiated by the customer. For example, automobile dealers have cars available on the property from which consumers can choose to buy.  In such cases, the car may not have the exact features desired, but fall within a range of acceptability for the consumer to complete the transaction.  The feature choice in cars available in the dealer’s on-site inventory is typically a result of marketing research performed by the dealer or the automobile manufacturer.  Alternatively, if the dealer’s on-site inventory does not match the wants and needs of the consumer, vehicle are ordered directly from the factory to their exact specifications. Thus personalization, cannot be accomplished without active participation of the consumer.

     The benefit of personalized marketing for companies is the ability to charge higher prices, increase customer loyalty, and improve customer satisfaction. However; companies should only undertake personalization if the costs, which may need investments in technology, consumer education, and branding yield an acceptable return (tangible and intangible) on such investments. In field experiments, results indicated hand-written, personalized notes increased requests for samples indicating personalization has a positive consumer response.

 To launch a personalized marketing program, companies should develop a process to find customers, differentiate between them, find opportunities to interact, and then finally customize their products or services to meet customer needs. While this approach may seem straight forward, it is very difficult to carry out in practice due to logistical and coordination challenges. Personalized marketing, when correctly implemented, can pay dividends in strengthening relationships with customers and increase profits.

Dynamic Pricing    

     One of the goals of personalized or one-to-one marketing is to connect on a deeper level with customers resulting in stronger customer loyalty and the opportunity to charge premium prices for their products and services.  For example, Caterpillar uses a layered approach to communicate its perceived value to consumers by identifying characteristics such as superior service, durability, reliability, and offering a longer warranties.  Research indicates that there is growing managerial evidence that shows dynamic pricing offers a tempting opportunity to increase profitability.  However, there is also significant risk for trust deterioration between the company and the customer if it becomes known the company uses dynamic pricing practices whereby the same class of customers are charged different prices.  For example, consumers are more tolerant of price differences for seniors, students, or customers in different geographic regions, but react negatively when price differences are demand based or not related to increased costs.  

     There are three common pricing models used primarily in retail stores. The first-degree pricing model focuses on price conscious consumers. The second level competes directly with national brands and priced about 20% lower than similar national brands. The last pricing model targets toward quality conscious customers.

     Products are priced using a variety of methods such as simple markup, perceived value, rate of return, or auction. Each approach has its advantages and disadvantages.  First-degree price discrimination is the most profitable because it has the potential to capture the full value of the product or service being offered. However, second-degree price discrimination consists of offering a variety of pricing options that allows the consumer to choose the desired pricing option based upon their wants, needs, or financial capabilities. This approach is more consistent with the viewpoint where personalization is a form of product differentiation and that consumers must take part in the personalization process as it relates to pricing policies to keep consumer trust.

     The key learning’s from this article is that marketers must personalize their marketing messages to navigate successfully through the tremendous amount of advertising background noise. Companies should undertake steps to find customers, differentiate between them, find opportunities to interact, and finally customize their products or services to meet customer needs.

 

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