Optimal Price Targeting

37 Pages Posted: 9 Apr 2021 Last revised: 29 Apr 2021

See all articles by Adam N. Smith

Adam N. Smith

University College London - UCL School of Management

Stephan Seiler

Imperial College Business School; Centre for Economic Policy Research

Ishant Aggarwal

Lloyds Banking Group

Date Written: April 29, 2021

Abstract

We examine the profitability of personalized pricing policies that are derived using different specifications of demand in a typical retail setting with consumer-level panel data. We generate pricing policies from a variety of models, including Bayesian hierarchical choice models, regularized regressions, and classification trees using different sets of data inputs. To compare pricing policies, we employ an inverse probability weighted estimator of profits that explicitly takes into account non-random price variation and the panel nature of the data. We find that the performance of machine learning models is highly varied, ranging from a 21% loss to a 17% gain relative to a blanket couponing strategy, and a standard Bayesian hierarchical logit model achieves a 17.5% gain. Across all models purchase histories lead to large improvements in profits, but demographic information only has a small impact. We show that out-of-sample hit probabilities, a standard measure of model performance, are uncorrelated with our profit estimator and provide poor guidance towards model selection.

Keywords: Targeting, Personalization, Heterogeneity, Choice Models, Machine Learning

JEL Classification: C11, C33, C45, C52, D12, L11, L81

Suggested Citation

Smith, Adam N. and Seiler, Stephan and Aggarwal, Ishant, Optimal Price Targeting (April 29, 2021). Available at SSRN: https://ssrn.com/abstract=3822459 or http://dx.doi.org/10.2139/ssrn.3822459

Adam N. Smith

University College London - UCL School of Management

1 Canada Square
London, E14 5AA
United Kingdom

Stephan Seiler (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research ( email )

London
United Kingdom

Ishant Aggarwal

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

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