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Rachel Wolff (00:00):

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(00:22):

Hello, listeners. It's Wednesday, September 17th. Welcome to Reimagining Retail, an EMARKETER Podcast made possible by Nielsen. I'm Rachel Wolff, your guest host for today's episode, which is all about whether AI-powered personalized pricing is the future. Before we dive in, let me introduce today's guests. I'm joined in the studio by our vice president of content, Suzy Davidkhanian. Hi, Suzy.

Suzy Davidkhanian (00:45):

Hi, Rachel and Zak.

Rachel Wolff (00:47):

I'm And we also have senior analyst Zak Stambor joining us from Chicago. Hey, Zak.

Zak Stambor (00:50):

Hey guys.

Rachel Wolff (00:56):

Delta got a lot of flak recently for revealing that it plans to ramp up the use of generative AI to price flights from about 3% of domestic flights today to 20% by the end of the year. According to Delta President Glen Hauenstein, the goal is to, "Have a price that's available on that flight on that time to you, the individual." Those statements raised a lot of alarm bells, including from lawmakers. Democratic senators Ruben Gallego, Mark Warner and Richard Blumenthal wrote a letter to Delta expressing their concerns over the airline's pricing plans, which they say raised data privacy concerns, in addition to potentially adding to the strain on consumer's wallets. So what do you both think of Delta's plans to use gen AI for pricing, and why do you think it generated so much backlash?

Zak Stambor (01:45):

Airlines have used dynamic pricing since the late seventies when Jimmy Carter deregulated the airline industry. But this felt different, because Delta talked very specifically about targeting the individual rather than just more broadly basing pricing on supply and demand and other factors like that. So that felt icky. It felt like Big Brother. And I think the other thing that was troublesome was that the company delivered mixed messages. When Delta was talking to investors, it talked very specifically about personalized pricing to the individual, but then when the senators wrote the letter and they issued a response, they said, "No, no, no, no, no. We're not talking about targeting individuals. We're just using this vast realm of data that we have to use a broader pool of data to dynamically price."

Suzy Davidkhanian (02:53):

I think that's the key here, right? It's that there seems to be a trust gap, and the company isn't authentic and transparent. And it almost feels like it's telling different stakeholder groups different things to try and alleviate tension. But if you think about, like Zak was saying, it's not that new, both dynamic pricing, I know this is a little bit, we're iffy on whether this was meant to be dynamic pricing or surveillance pricing. But this idea that you will get personalized pricing could even be a little bit more like the surge pricing or not surge pricing for an Uber, which is different from taking a taxi, or I was thinking about this.

(03:37):

If you think about matinee pricing, right? It's the same movie, it's the same place, it's the same popcorn, but if you go at an off-hour, whatever the theater deems as an off-hour, it's a little bit of a cheaper price. So in some ways, it's not unusual for companies to either use promotions, coupons, or other mechanisms like matinee pricing to change the cost of a good, but it's the way you do it and the way you frame it that I think for Delta was causing the most backlash.

Zak Stambor (04:06):

Yeah, I totally agree. I think dynamic pricing is not new. The example that I think of is happy hour is the prime example of dynamic pricing. There's a low in demand, so you lower the price and demand then goes up. Surveillance pricing is different, and it feels very different to the consumer because it's about you. It's about your personal data and how your personal data is being used. And I think people just generally feel uncomfortable about that.

Suzy Davidkhanian (04:36):

Right. And dynamic pricing, I think everybody's accustomed to it in some way around supply demand, where the item changes prices based on the time of day or the location so that there's a smoothed out demand curve. And that feels fair. It's like you know when happy hour is, you know when matinee pricing is, you know to check for airlines in incognito mode on a Monday morning, because that's when you'll have the better price. So I think in that way, it seems much more palatable than a constant black box that could be surveillance in addition to all the privacy concerns that come with that.

Rachel Wolff (05:16):

Yeah. I mean, as you mentioned, a lot of companies have already engaged in dynamic pricing in certain ways, but do you think that there is a trend toward using AI to be even more dynamic, right, instead of having set times where prices are lower, having them change throughout the day, for example?

Suzy Davidkhanian (05:31):

We're definitely seeing that already online. The crystal ball is we'll be able to do that in a store even with digital shelf tags, and there are a lot of nuances that companies are going to have to think about. But I was also thinking about online, if people are sharing passwords and they're using personal history, sort of data, how do they know who I am when I have stuff in my cart? Do they know if I'm the mom or the dad or the kid? Is it the aunt using my account? You don't know. And so I think there's a lot of trickiness that happens with surveillance pricing online that's even harder to manage in a store.

Rachel Wolff (06:09):

I think also, dynamic pricing in general has a bad rap, right? Any company that says they plan to use dynamic pricing, there will be an immediate backlash. So it's about how you sort of massage expectations in that regard.

Zak Stambor (06:20):

I think that kind of depends though. I mean, I think people certainly use Uber and Lyft and they don't have a problem with that. They're accustomed to dynamic pricing with airlines. Airfare has been a black box forever, and the person sitting next to you very well may have paid double or half as much as you did, and you just don't know. It's when it gets down to the grocery store or when you're shopping for apparel or whatever it might be. That's where it kind of feels different.

Suzy Davidkhanian (06:50):

Well, and I think Hotels.com was the company that made that ad where the two people check in at the same time and they're paying different rates for the hotel. And so it's something everyone knows. I almost feel like we may have not made a big enough point that dynamic pricing is so different from surveillance pricing.

Rachel Wolff (07:08):

Yeah. Why don't we go into that a little bit and explain the definitions there?

Zak Stambor (07:12):

So dynamic pricing is pricing that adjusts based on market conditions. So that might be demand or seasonality or supply or anything along those lines. Surveillance pricing is when prices adjust based on the individual's data. So it might be their location. It might be whether they're a member of a loyalty program. It might be their demographics, it might be their browsing history. Lina Khan, the former FTC chair, even suggested that it might be based on your mouse movements. So there's all sorts of very personal information that gets filtered into this formula that determines what price it is that you are paying. So that's very different than dynamic pricing.

Suzy Davidkhanian (07:58):

Yeah. It feels much more discriminatory as well than dynamic pricing. And that's very different from coupons and promotions, right? Because that too triggers a price change or markdowns, which are when something is on sale, but forever sale versus the price going up or down when it's a coupon or a promotion. But customers are used to that just like they're used to Uber and Lyft having different pricing. It's that surveillance, like you had set up before. It's that Big Brother watching me, using me, gouging me kind of negative connotation.

Zak Stambor (08:32):

And I think right now, it's particularly problematic because consumers are hyper-attuned to price and value and they don't want to feel like they're being squeezed. If they feel like they're being squeezed because of who they are, where they live, what they looked at previously online, it makes them feel distrustful of the company that they're shopping at, and that gets to trust. Once trust is gone, it's really hard to win that back.

Rachel Wolff (09:08):

Yeah, I mean, 68% of consumers agree that dynamic pricing is price gouging, and this is according to a civic science survey from last March. And obviously that's the majority of consumers, right? So clearly there is a potential to lose customer trust by leaning too heavily on dynamic pricing or even surveillance pricing.

Zak Stambor (09:27):

Yeah. We saw a great example of the backlash to dynamic pricing last year when Wendy's began testing dynamic pricing with its digital menu boards, and people freaked out. I mean, it was just a massive uproar. And it gets to perception, because while Wendy's thought, "We're going to lower the prices at slow periods of time," consumers saw prices rising during busier times. And so no matter how you frame it, shoppers are going to assume, rightly or wrongly, that they're going to end up paying more.

Suzy Davidkhanian (10:09):

I mean, I think-

Zak Stambor (10:10):

And they don't like that.

Suzy Davidkhanian (10:11):

No, absolutely. Who wants to pay more for something that they know they can get at a better price? That's why outlet stores and the TJXs of the world do well. But it does bring up another really interesting point around gamification. Price coupon, sort of like a one-day sale and stacking coupons and using your loyalty points and doing this and doing that to get the best price possible is what some consumers love doing. This is almost taken away from them.

(10:39):

And so it's not only are they being squeezed, but it's also like, are you kidding me? You don't think I understand the system well enough to get it at the best price for me when I'm ready to do it? So I think there's also that element of consumer, not just lack of trust, but not empathetic in any way. Because for some retailers, it's really helpful to have dynamic pricing or to be able to use one-day sales, for example, or Kohl's Days or whatever, Amazon Prime Days, to move merchandise or to be able to calculate their margin in a good way, or to reduce waste to try and move merchandise to bring in the next set of merchandise for the next season.

(11:19):

So if it's done well, and so one of your questions was around will AI help us? I think if the AI vendors who help consumers see that it's happening as a natural part of the shopping journey and it doesn't feel like I got you moments and it's a seamless part where it's very transparent why the price is going up or down, and maybe it doesn't go up as much as it does down, there's a ceiling on the price, but the down piece is okay, that's kind of like a regular sale, right? Everybody knows the dress is going to be a hundred dollars, and if you really need it or want it, you pay the a hundred dollars. But if you're not obsessed with it, you'll wait until it goes on sale and then you'll buy it. I feel like there has to be a place where dynamic pricing will work for everybody.

Rachel Wolff (12:06):

So going back to surveillance pricing, the previous administration took some preliminary steps to curb the practice. Do you think that these efforts are going to continue? And if so, who's going to be leading the charge? Under Biden, it was the FTC. Or will it be more like what we saw with data privacy where it's more on a state by state basis?

Zak Stambor (12:26):

Yeah, I do not think the FTC is going to act. I think it will be up to the states. I think we have started to see the states move in this direction, or at least I should say a handful of states like California, I think Illinois, I think Georgia, a handful of others. But that creates a really challenging dynamic because you just have a patchwork of state bills that all are different, and that makes it really difficult for a company to navigate. But we haven't even gone there. Some of them are narrowing, some of them are stalling, some of them are just falling flat. So right now, there's just not a whole lot of momentum in that direction, even if there is some movement.

Rachel Wolff (13:13):

Do you think that will change once inflation creeps up due to tariffs and there's a lot more attention being paid to pricing and how companies are approaching it?

Zak Stambor (13:23):

I think in some more progressive states, there certainly could be some push in that direction, but even California just a few weeks ago saw their bill narrow. And I think it's just kind of stalled out at the moment. And so there's a lot of pushback from the industry, and getting past that is really challenging.

Rachel Wolff (13:46):

Are there any benefits for retailers or consumers or both to dynamic pricing?

Zak Stambor (13:52):

I think it depends on transparency. There's a Dutch grocer that uses dynamic pricing to move products that are going to expire. So they have a system in place where there are more and more markdowns the more the inventory needs to move, and consumers can get a pretty steep discount. I think it's like 25 or 70% or 90% off depending on when it's going to expire. And so ultimately, it is good for the consumer, they get a deal, and it's good for the grocer because they move products that they otherwise would just throw away.

Suzy Davidkhanian (14:34):

Which is good for a consumer if you understand how it works, right? So if the retailer is open with you about how they're doing it, then that is good for your pocketbook too, and it's good for the environment.

Rachel Wolff (14:45):

Yeah. I think you also have to trust that the grocer is pricing things fairly at the beginning of the day though to hold with that idea of transparency.

Zak Stambor (14:54):

Yeah, for sure.

Rachel Wolff (14:54):

All right. That's all we have time for. Thanks to Zak.

Zak Stambor (14:58):

Yeah, thanks for having me.

Rachel Wolff (14:59):

And thanks to Suzy.

Suzy Davidkhanian (15:00):

Thank you.

Rachel Wolff (15:01):

And thanks to the editing crew, and to everyone for listening in to Reimagining Retail, an EMARKETER podcast made possible by Nielsen. Subscribe and follow us to hear about new episodes and give us a rating and review if you have time. This show will be back next week with our September Most Interesting Retailers of the Month list.