What is personalized pricing, and how can you avoid it?

The Rise of Personalized Pricing and Its Implications

Delta Air Lines recently announced its expansion of artificial intelligence (AI) to offer individualized pricing to customers. This move has raised concerns among travelers and lawmakers alike. However, Delta is not alone in exploring this approach. Customized pricing has already gained traction across various industries, including finance and online gaming. This strategy, where each customer receives a different price for the same product, is considered a key goal for businesses because it can significantly increase profits. It allows companies to charge more from those who are willing to spend while offering lower prices to more price-sensitive consumers. Just as clothing can be tailored to fit each person, custom pricing aims to align with each individual’s ability and willingness to pay.

As a professor who teaches business school students how to set prices, I have explored the implications of personalized pricing in my latest book, “The Power of Cash: Why Using Paper Money is Good for You and Society.” I am particularly concerned about the lack of transparency in AI-driven pricing models and their potential to exploit financially unsophisticated individuals.

A Historical Perspective on Custom Pricing

For much of history, customized pricing was the norm. In the past, business owners would assess each customer during face-to-face interactions and negotiate prices based on the buyer's and seller's bargaining skills—and sometimes desperation. An old joke illustrates this process: a wealthy man once ordered eggs at a restaurant and was shocked by the price. When he asked if eggs were rare, the owner replied, “Eggs are plentiful, but very rich men are quite rare.”

This form of price negotiation still exists in certain industries, such as car dealerships, where each vehicle sale involves unique pricing. Economists refer to this as “first-degree” or “perfect” price discrimination, which is ideal from the seller’s perspective because it allows them to charge each customer the maximum amount they’re willing to pay.

The Shift to Uniform Pricing

In modern times, most American shoppers encounter set prices rather than negotiated ones. Many scholars attribute the rise of uniform pricing to John Wanamaker’s Philadelphia department store, which opened in 1876. His store introduced nonnegotiable price tags, making shopping simpler for customers and eventually becoming widely popular.

Set prices offer several advantages for businesses. They allow stores to hire less skilled workers instead of experts in negotiation. Historically, they also simplified pricing decisions. Before AI, many companies used a “cost-plus” pricing model, where a fixed percentage was added to an item’s cost to cover profits and overhead. For example, Costco still uses this method, adding approximately a 15% markup to items sold in its warehouses.

However, the cost-plus model treats all products equally, which can be inefficient. For instance, customers buying expensive Champagne may be willing to pay a higher markup than those purchasing inexpensive boxed wine. AI helps overcome this limitation by analyzing data to determine the optimal markup for each item.

The Impact of AI on Pricing Strategies

AI requires vast amounts of data to function effectively. The shift from cash to electronic payments has enabled businesses to collect what some call a “gold mine” of consumer information. Companies like Mastercard claim their data allows them to develop optimal pricing strategies. In 2024, the Federal Trade Commission (FTC) issued civil subpoenas to financial institutions, including Mastercard and JPMorgan Chase, demanding information on how AI might be used to vary prices based on individual consumer data.

Experiments conducted by the FTC have shown that AI programs can even collude with one another to raise prices without human intervention. Some states have laws requiring retailers to display a single price for each product. Despite these regulations, businesses can still implement customized pricing through targeted digital coupons that vary discounts for different shoppers.

How to Outsmart AI Pricing

There are ways to counteract AI-driven personalized pricing. One effective strategy is to use paper money when shopping in physical stores. Cash is private and leaves no digital trail that can be tracked online.

When shopping online, clearing your browser cache can help prevent algorithms from accessing your search history and cookies. While some argue that this practice is an urban myth, recent FTC analysis shows that the latest AI algorithms adjust prices based on cached data.

Another tactic is to consider your location, as it often serves as a proxy for income. I once experienced this firsthand when booking a plane ticket in Botswana. The price initially showed as $200, but after using my university’s VPN, the cost jumped to $1,000. Turning off the VPN restored the original price.

Finally, in face-to-face negotiations, walking away can lead to better deals. Online, you can mimic this by placing an item in your cart and waiting before purchasing. I once bought eyeglasses online and, due to a delay, received a significant discount.

The Future of Pricing in a Digital World

The computer revolution has made it easier to create custom products at lower costs. Combined with a cashless society and AI, this trend sets the stage for widespread personalized pricing. In such scenarios, a high price does not necessarily indicate higher quality—it simply means a business believes a customer is willing to pay more.

Using cash more frequently can help resist personalized pricing. However, given the rapid advancements in AI, it’s crucial to start discussing how prices are determined before customized pricing becomes the norm.