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Keywords Pricing strategy, Perception, Differentiation, Equity
Abstract In September 2000, Amazon.com attempted to implement a differential pricing structure that would track online purchasing behaviors to charge loyal customers higher prices for the same product. Amazon's customers met this new pricing initiative with extreme displeasure, forcing the company to end its trial with differential pricing. Differential pricing is not new. Industries such as travel and retail have charged consumers different prices for years through special promotions such as frequent flyer miles and loyal customer discount cards. Why is it then that Amazon's customers perceived the company's differential pricing structure as being unfair? More importantly, are there times when such pricing is acceptable? An understanding of the concepts of distributive and procedural justice, as well as equity theory and dual entitlement, provides managers with the defining principles of price fairness. Implementing these concepts and theories into the firm's pricing practices will increase the likelihood that customers will perceive differential pricing as being fair.
Introduction
In September 2000, Amazon.com's customers discovered that the e-tailer was selling the same DVD movies at different prices to different customers. Depending on previous purchase patterns with Amazon a DVD such as The XFiles - The Complete Second Season could cost a customer anywhere from $80-$100 (Adamy, 2000). Consumers soon uncovered the differential pricing and flooded chat boards with complaints against the company. Amazon quickly issued reports disclaiming that it was charging different prices for the same product for different customers depending on previous shopping behavior. Instead, Amazon stated that it was merely testing "how customers respond to various prices," quickly canceled its differential pricing and refunded the difference to customers who paid the higher prices (Adamy, 2000).
Negative response
Amazon's experience with differential or dynamic pricing, whether it intended to engage in this behavior or not, suggests that consumers negatively respond to paying different prices for the same product. Note that Amazon's customers did not necessarily balk at paying higher prices; rather the shoppers became angry when they perceived that the company was using previous, personal shopping patterns to charge some consumers higher prices for the same product than other consumers.
Pricing decisions
Amazon's experiment with differential prices is not new. For example, the airline industry has been charging different...