While brands have used dynamic pricing to adjust prices based on supply and demand for years, more and more brands are turning to algorithms and, increasingly, AI to estimate what an individual customer is willing to pay, drawing on factors such as device type, location, battery level and purchase history.
Companies can use individualized prices based on personal data, a practice known as surveillance pricing, which experts warn it could undermine customer trust and erode loyalty.
“It’s very short-sighted,” said Jeannie Walters, founder and chief experience investigator at Experience Investigators. "If customers could see everyone else's price in real time, what would that feel like?"
Surveillance pricing can boost the bottom line in the short term, but retailers risk alienating customers and undermining their long-term business goals.
"Perception is reality,” Walters said. “If people feel like the price is based on ‘who I am’ instead of what the product actually costs, that feels really icky.”
The loyalty tax
Surveillance pricing systems often charge higher prices to consumers who are unlikely to change their shopping behavior, which can spark consumer backlash by inadvertently punishing loyal customers and rewarding churn.
Bob Ghafouri, managing director at A&MPLIFY, Alvarez & Marsal’s AI-powered digital agency, calls it “the loyalty tax.”
He warned that charging different prices to individual shoppers can create an adversarial relationship between brands and consumers, as customers begin to “game” the system by checking multiple devices, using incognito modes, timing purchases and using AI shopping assistants to find the best price.
It’s a major issue in the hospitality industry, as customers book, cancel and rebook hotel rooms to avoid being overcharged and feeling ripped off.
“The playing field is very different now. Customers have a lot of access to information, and they’re getting savvier,” Walters said.
The regulatory landscape is evolving, too.
This year, New York became the first state to require businesses to disclose when they use surveillance pricing. Various “restrictions on the use of personalized pricing based on data about a customer have been proposed in a number of other jurisdictions,” according to law firm Skadden, Arps, Slate, Meagher & Flom.
The U.S. Federal Trade Commission has also launched several inquiries into companies’ surveillance pricing practices over privacy and anti-competitive concerns. In December, Reuters first reported that the agency had begun investigating Instacart’s AI-pricing tool after a study found on average a 7% difference in the total cost of the same grocery list at the same store.
Transparency = trust
There are best practices brands can follow to avoid upsetting customers and attracting public scrutiny.
Clear communication and transparency are essential. Retailers should explain when and why pricing changes occurred.
“Be absolutely upfront about it,” said Joseph Turow, professor emeritus of communication at the University of Pennsylvania’s Annenberg School for Communication.
Brands also need to be consistent, especially for individual consumers, because without transparency, even fair pricing can feel deceptive.
“If I put something in my digital cart, the price should be the same when I come back two days later,” Walters said.
Retailers should also reward loyalty rather than punish it. Instead of raising prices on loyal customers, brands should offer lower prices to boost retention and attract new customers.
Monitoring customer perceptions, including tracking complaints, refunds, cart abandonment and other signals of dissatisfaction, can also help brands avoid alienating customers. Experts recommend pilot testing different pricing approaches and soliciting customer feedback before rolling out surveillance pricing.
Businesses should also audit the software and data they use to prevent discriminatory or exploitative pricing, which can help businesses avoid bad press and legal scrutiny, experts say.
“Maintain human oversight and review algorithms regularly,” Ghafouri said.
Regardless, giving customers the ability to manage their data with clear opt-out options helps ensure they feel in control rather than along for the ride.
So, while surveillance pricing can boost profits in the short term, experts encourage CX leaders to take the long view.
“Squeezing an extra 5% out of a transaction today can cost you 100% of that customer's future lifetime value,” Ghafouri said.
