AI Pricing: Delta's Experiment, Customer Loyalty, and the Dangers of Personalization

The Delta AI Fare Experiment

• ✈️ Delta Air Lines announced plans to use AI for setting fares on up to 20% of flights, a significant increase from previous levels.
• ⚠️ This move sparked concern, with initial reports suggesting highly personalized pricing, though Delta and its partner Fetcher have since clarified it's not strictly one-to-one personalization.

Risks of Granular Pricing

• 💰 The primary opportunity for AI in pricing is to better reflect demand and supply, maximizing revenue.
• 📉 However, the risks include potential PR backlash, ethical concerns, and legal issues if pricing becomes too granular or discriminatory.
• 🧠 AI enables pricing changes at a very granular level, potentially hourly, which can backfire economically and emotionally.

Customer Psychology and Loyalty

• भावनात्मक People have strong emotional reactions to price levels and changes, often comparing current prices to past prices or competitor offerings.
• ⚖️ Reference price effects and prospect theory, concepts recognized by Nobel laureates, explain how customers perceive prices as gains or losses, which optimization algorithms often overlook.
• 💔 Over-optimizing for short-term revenue can lead to customers feeling gouged, damaging long-term loyalty, engagement, and positive word-of-mouth.

Strategic Pricing vs. Personalized Pricing

• 🎯 Dynamic pricing, where prices change based on demand and time of purchase, is generally accepted.
• 🚫 Personalized pricing, where different customers see different prices for the same item at the same time, carries significant risks, including major PR backlash, as seen in a past Amazon experiment.
• ⚠️ AI's role in personalized pricing could inadvertently lead to discrimination based on protected characteristics if not carefully managed, approaching a "third rail" of business practice.

Advice for Businesses

• 🐢 Companies should move slowly and experiment cautiously with dynamic pricing, starting with limited sections, games, or price tiers.
• 📊 A broader, long-term perspective is crucial, evaluating not just immediate revenue but also the impact on customer loyalty, season ticket holders, and overall engagement.
• 📈 While data is important, even small businesses can benefit from understanding customer price sensitivity and value to develop appropriate pricing policies, avoiding excessive granularity and focusing on sustainable customer relationships.