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21 November 2012

The future is personalised pricing

But this isn't necessarily a bad thing.

By Martha Gill

On a recent trip to Kenya I found that the amount you get charged for a bus ride depends mostly on how badly you look like you need one. The longer it you’ve been waiting, the more bags you have, the more irritated the look on your face, the more you’ll end up paying.

This is not a great system for commuters, but is one that seems to be  coming in to force online. The Office of Fair Trading is currently looking in to personalised pricing – where retailers use information they’ve gathered about customers to decide how much to charge them. The information is collected either from previous purchases on the site or bought through a third party – retailers then potentially charging some people higher prices.

Particular worries have been raised about flights and hotel rates. There have been allegations that companies look at your computer brand or area (indications of wealth) to help them decide on hotel price, and that flight prices are changed depending what on other sites you have been looking at. This is very annoying, expecially for customers whose activity indicates that they are a) rich or b) badly need the service.

But as the FT points out, a system of fixed pricing isn’t inevitable. It makes sense for retailers to try and squeeze all they can out of each customer, and fixed pricing only came in to fashion for practical reasons – high volumes making it impossible to keep track of individual buyers. But technology is changing this, allowing prices to splinter. Here’s FT Alphaville:

We can find ourselves in a situation where we have inflation and deflation simultaneously across society. And not on a product level, but on a demographic level.

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In fact it’s not too crazy to imagine an environment where prices get higher quickly for the 1 per cent, but lower for the 99 per cent. The 1 per cent are, after all, already prepared to pay over the pure cost price in many areas. Of course, the situation could be inverted as well.

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The results of the change could be huge, but perhaps the Office of Fair Trading should stay out of it. Kenyan bus drivers use personalised pricing because it maximises profits and because they can. It makes a certain amount of sense for other businesses to start doing the same.