Do you discriminate?
If we call it something else, it's acceptable
Hey there, it’s Jacob at Retention.Blog 👋
I got tired of reading high-level strategy articles, so I started writing actionable advice I would want to read.
Every Tuesday I share practical learnings you can apply to your business.
People like sales, but they don’t like getting discriminated against
Do you offer sales to certain segments of your users? Technically, you are price discriminating.
Do you offer discounts to students? Do you offer discounts to free to users who use your product a lot?
Rideshare apps and airlines price discriminate based on demand.
Buying the last seat available on a plane? Pay more. Booking an Uber home at rush hour? Pay more.
Consumers don't love this, but it’s become accepted.
Companies call this dynamic pricing not price discrimination. I wonder why…
People understand if a price is different in different countries. They aren’t as understanding of pricing that changes based on who you are or what you do.
Both may represent differences in ability to pay, but one is much more personal.
So what form of price discrimination is okay, and what isn’t?
Commonly accepted dynamic pricing:
Location-based pricing
At a country level for digital products, but we accept differences in prices at a much more granular level for physical products
Volume based pricing
Purchase more, get a discount
Sales based on usage
Use the product more, get a discount. Or get a discount if you use it less
Membership based pricing
“Create an account and get 10% off”
Student and senior pricing
Being over 40 is a protected class in the US, so legally you can price discriminate based on younger ages. Should you? Probably not.
Grey area:
Demand-based pricing
Uber and airlines get away with this, but a grocery store couldn’t employ this tactic without backlash (Talking to you Amazon/Whole Foods)
Device-based pricing
People aren’t thrilled if their friend has an Android and you have an iPhone, and you open the same site or app and see different prices. This is more common than you may think.
Targeting based on past behavior
You’re a high frequent spender, so you’re shown higher-priced products
Personal attribute-based pricing (outside of protected classes)
Receiving different prices based on who you are, what you do, where you live
What does “grey” mean? These are used and not illegal, but based on your industry or user base, they may not be accepted.
Illegal:
Different pricing based on protected classes (US and EU)
Race, color, religion, sex, nationality or ancestry, age, disability, veteran status
Different pricing solely based on differences in nationality or origin (EU)
Don’t take these lightly. Bumble had a $3 million settlement a few years ago because they were only offering male users certain paid products.
Is anything else illegal?
The FTC Act (US) prohibits "unfair or deceptive acts or practices" in commerce. This is a broad mandate that allows them to act at their discretion.
A recent example is Intuit Turbotax. They pitched free tax filing service, but 2/3rds or more of tax filers couldn’t use the free service.
I couldn’t find anything in the FTC case database on dynamic pricing.
The EU has similar protected class laws as the US, but EU regulations on the protection of consumers are more focused on ensuring equal treatment across member states.
So you can’t apply different pricing in Spain vs Germany?
You’re not allowed to limit access based on a customer’s nationality and can’t apply different pricing based solely on the customer’s nationality.
You can change prices based on delivery costs, local taxes, and general market conditions (including demand or supply).
As long as you’re not changing prices solely based on someone’s nationality, and account for purchasing power, differing costs, or other market dynamics, applying different country-based pricing should be okay.
How does this apply to dynamic pricing?
Dynamic pricing has some limitations based on laws, but the major limitations are based on consumer sentiment.
It’s relatively easy to not break any laws when deploying dynamic pricing.
The nuances come down to illegal vs ethical.
Ethical issues are never as easy.
If you don’t make the ethical decision, your customers might make it for you.
There can be a huge backlash if customers perceive you are unfairly showing different prices to different people.
You can look at this in two ways:
Let’s only use dynamic pricing strategies that our customers would be comfortable with
Let’s hide our dynamic pricing strategies
Obviously, #1 is more ethical. And the ethical approach is more sustainable in the long run.
How do I use this info?
If you’re using ML-based pricing optimization vs. rule-based logic, be careful not to use any of those protected classes. E.g. don’t feed in gender as a variable in your model since you may end up with illegal pricing discrimination.
Start with applying common sense about how you would like to be treated. Would you be comfortable publishing a press release about your dynamic pricing?
Second, make sure you’re offering some benefit to the user. Any strategy will only be sustainable long-term if your customers receive something additional or it improves their experience.
Uber’s surge pricing can be frustrating, but it increases the supply of rides during periods of high demand. This creates a more valuable and predictable service for customers.
Large-scale dynamic pricing is an optimization and incremental tactic. If you don’t have a good profitable business, implementing dynamic pricing won’t completely change your business.
Focus on the fundamentals first.
P.S. How should you implement dynamic pricing?
I like Jakob Chour’s post on Phiture’s blog here.
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