Hidden prices South Africans pay

Data analytics have given local firms the ability to use automated pricing algorithms to charge personalised prices to every customer based on their data profile, meaning some customers may pay more for the same products than others.

This was explained by Cliffe Dekker Hofmeyr’s Director of Competition Law, Lara Granville, and Senior Competition Law Associate, Reece May, who said that automated personalised pricing favours certain customers over others.

“Personalised pricing involves a firm’s use of data gathered from customers (such as location, purchase and browsing history, and, potentially, demographic data) to set tailored prices according to the characteristics of a particular customer,” they said. 

“This allows firms to personalise their pricing based on what customers are willing to pay.” 

Benjamin Garden, Director of Pricing Analytics at Iris Pricing Solutions, explained that AI algorithms, with the ability to analyse vast amounts of data in real time, offer the potential to identify optimal pricing for products or services at any given time.

“AI-powered pricing refers to the use of artificial intelligence algorithms to analyse large amounts of data and make pricing decisions based on that analysis.” 

“This type of pricing uses data-driven insights and predictive analytics to determine the most optimal price for products or services.” 

“The goal of AI-powered pricing is to maximise revenue and profitability while also considering factors such as customer behaviour, market trends, and competition.”

Granville and May explained that prices are reduced for customers who would ordinarily not purchase a product or service, and for customers willing to pay more for the same product or service, the prices are increased. 

Pricing strategies have a long history and are crucial for a business’s profitability. Prices vary based on several factors, including location, timing, and promotions.

Some pricing strategies even consider the psychology of prices, using the price to say something about a product. It could indicate that it is high quality, for a product like a Rolex, or that it is good value, for example, a half-price pizza.

Nevo Hadas, partner at Dydx, explained this in the textbook Marketing to South African Consumers.

He said that the large level of income inequality in South Africa also impacts pricing strategies. 

“Pricing can vary hugely in South Africa, with one end of the spectrum meeting the demands of the country’s elite and the other meeting the demands of the poorest of the poor,” he said.

“A common example of this is the pricing of foodstuff. The cost of chicken in upmarket shops like Woolworths differs markedly from the chicken offcuts sold in townships on street corners or even in lower-cost stores like Shoprite.” 

“It is this vast divide in the South African consumer market that makes finding a clear target market and paying close attention to pricing strategies imperative to the success of any business.”

Compared to other pricing strategies, personalised pricing is more advanced and individualised, leveraging personal data to optimise prices for each customer.

The South African Competition Act prohibits dominant firms, which have more than 45% market share or have the power to control prices, from charging a different price to customers for the same product or service, Granville and May said.

Where this is the case, differentiated pricing can amount to price discrimination if all of the following criteria are met:

• The firm charges different prices or provides different discounts, allowances, rebates or credit or provides different services in respect of the products or services (e.g. free delivery) to different customers
• Different prices are charged for equivalent goods and services of the same quality
• It significantly reduces competition or hinders the ability of small businesses and historically disadvantaged persons to compete in the market

They explained that economists refer to three types of price discrimination.

“First-degree price discrimination is where each customer is charged a different price that perfectly matches their willingness to pay,” they said.

Second-degree price discrimination is where a supplier charges different prices based on the amount purchased.  

This includes quantity discounts, special offers to customers buying in bulk, buy-two-get-one offers, and loyalty rewards cards for frequent customers.

Third-degree price discrimination occurs when different groups of customers, such as students and pensioners, are charged different prices. 

“The type of price discrimination we are considering here is first-degree price discrimination – this is the holy grail for businesses because the business captures the full consumer surplus.”

Consumer surplus happens when consumers pay less for a product or service than they are willing to pay, which benefits them. 

If companies are able to measure exactly what a customer is willing to pay and charge them accordingly, consumers will lose out on these savings. 

Automated personalised pricing favours certain customers over others, which might violate the Act’s price discrimination rules.

“That said, the existing provisions in the Act do not necessarily provide the framework for a proper analysis of the harms and benefits arising from such relatively new technologies and determining whether they are helpful or harmful in the South African context.”