Throughout most of the history of commerce, price was the outcome of a barter, haggle, or negotiation between sellers and buyers, typically in the context of an ongoing relationship. Different buyers achieved different prices depending on their current situation, needs, and bargaining power. In other words, prices were participative and personal.
However, starting in around the 1850s, the shift to mass retail shoved this protocol to the side. Shoppers no longer purchased from individuals, but from organizations preoccupied by economic efficiency. The company dictated terms, with prices set to achieve some financial objective and offered to the whole market on a take-it-or-leave-it basis. Indeed, the price tag gained popularity in those years with the arrival of the department store. John Wanamaker, the trailblazing, deeply religious American merchant owner of a department store by the same name opined, “If everyone is equal before God, then everyone should also be equal before price.” Prices became imposed and impersonal.
Today’s technologies make it possible to achieve personalization and dialog at scale, yet businesses are stuck in the “arm’s length” logic that they set prices and the market accepts or rejects them. Businesses may appreciate that prices should mirror the individual situations of customers (as they once did), and indeed dynamic pricing is a booming field, but there is no real consensus on how to make this happen in a way that is palatable to customers.
Our suggestion seeks to reap the economic benefit of price discrimination while retaining the efficiency inherent to institutionalized commerce. The goal is to create an environment where company and customer explore different pricing rationales over time, searching for a balance that both sides perceive as fair. To achieve this, we emphasize three building blocks (for a similar rationale, see Bertini and Gourville 2012).
Companies are embracing the idea of delegating activities to customers. We see it in product development and advertising, among others. But what about pricing? After all, the “right” price from a company’s perspective is contingent on the value perceived by the buyer. Moreover, asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction (for more on the relationship between pricing and engagement, see Bertini and Wathieu 2010).
Customer participation of course need not be an all-or-nothing proposition, as different pricing mechanisms involve customers to different extents (Bertini and Koenigsberg 2014; Spann et al. 2018). Irrespective, consider for a second the extreme case of pay-what-you-want, which has gained a foothold in some commercial contexts. Intuition suggests that letting customers dictate prices is foolhardy, practical only as a cute promotional stunt. Indeed, the thought of yielding any pricing power is often frightening to managers. However, a growing body of academic research and business experience shows that the selling context can be managed creatively to prime customers to pay fairly—even generously (Kim et al. 2009; Natter and Kaufmann 2015). Few customers take a purely self-interested economic perspective on exchanges. Rather, people are often driven by social values and norms (of fairness, reciprocity, altruism, etc.), they respond to trust and transparency and to different styles of communication, and they can be swayed by how choices are presented to them—all of which can drive cooperation (Santana and Morwitz 2014).
Tapping the market for insight and feedback is sound, intuitive advice. But how often does a company work to create a true dialog with its customers? In addition, even if there is a structure in place to communicate, how often does this structure inform the challenging task of putting a price on value? The ideal pricing process is one where there is (plenty of) learning, one where the company gradually discovers what each customer (or, at least, different customer segment) values and why, and in return, the customer perceives a willingness from the company to reciprocate with increasingly tailored offerings.
Modern e-commerce platforms can enable this sort of rich, automated, and personalized discussion. The technology is there, but it is currently underused. Two good examples are customer relationship management and social media systems, typically employed to manage interactions and build loyalty, not to engage customers into meaningful conversations. Our suggestion is that pricing processes formalize and integrate dialogs about all things of value—needs, wants, features, services, pain points, price levels, current and future transactions, etc. As a result, prices become emergent and better attuned to dynamic and complex market environments (Smith 2012). This kind of cooperation in pricing has been labeled “co-pricing” in existing conceptual work (Frow et al. 2015). We propose a practical form of this concept.
Relationships depend on reputation. Customer participation in pricing needs to be counterbalanced by feedback about results—a control mechanism for the company to decide when and how much discretion to grant. That is, the customer’s power to set prices cannot be absolute; it must depend explicitly on her behavior. We propose to anchor this feedback control on perceptions of fairness, as the overall objective is to focus both parties to an exchange on the need for outcomes that are mutually beneficial.
From the perspective of the business, a “fair” customer is probably one who is sufficiently profitable over the length of the relationship. Instituting a “fairness rating” for each customer, one that updates automatically over time, enables companies to manage the allocation of pricing discretion. This suggestion is a logical extension of the more familiar rating systems we see in reward programs, sharing services, credit scoring, and the like. One resulting application is to put customers who repeatedly price unfairly on “warning,” and eventually even to revoke their pricing privilege. Similarly, the fairness rating serves to reward customers who price generously (with additional features, premium product offers, etc.). Meanwhile, a “fair” business from the perspective of the customer is probably one that provides sufficient value for money over the length of the relationship, one that is transparent and trustworthy, and one that is open and responsive to meaningful dialogs.