An increasing number of companies are offering personalized products to their consumers. When you visit the website of Amazon, they will provide you with personalized recommendations. The same applies to Spotify with recommended music or Groupon with personalized discount offers. This done through behavior-based personalization, which provides companies with the ability to offer personalized products to their customers based on their purchase history. The reason why so many companies adopt behavior-based personalization is due to the fact that the purchase history of a consumer reflects their tastes. As a result, companies are able to serve consumer needs better by personalizing the product offerings based on the past choices of the customer.

Although many benefits arise through personalization, Zhang (2011) has identified two perils of behavior-based personalization in competitive markets. The first peril is related to behavior-based price discrimination. Imagine that you sign up for a Spotify account. Your local music store can derive from this information that you probably appreciate the convenience of online music. As a reaction, your local music store decides that they want to offer you online music as well in order to serve you better. As a result, this shift from your local music store diminishes the differentiation between the two. Therefore, behavior-based price discrimination intensifies price competition, which is the “first peril of behavior-based personalization”. 

The second peril results as companies try to avoid the first peril. In the same example, if Spotify changes towards a more mainstream service mode in order to attract a bigger audience and thereby captures the entire market. As the local music store want to avoid the first peril, they are forced to accommodate Spotify as a market leader. As a result, both parties will offer a more mainstream service, which jeopardizes differentiation. This is labeled as the “second peril of behavior-based personalization”.

The main analysis of these perils are based on the fact that a company does not have an information advantage over its rival. But, how does this change if companies do have this? As these companies can obtain valuable information about the customers and their preferences, they are able to apply mass personalized products at high prices. However, this would only be possible in the mature stage of the market. As a result, companies would compete intensively at the early stage and try to attract customers through cash incentives. This technique is applied by telecommunications companies, as they try to attract customers through offering free mobile phones with their subscriptions.

Behavior-personalization has many advantages and opportunities for companies, but it also has its perils. What do you think: is it becoming easier to differentiate as more customer data becomes available or is it becoming harder as more companies have access to this data?

Reference:

Zhang, J. (2011). The perils of behavior-based personalization. Marketing Science, 30(1), 170-186.