Optimal Price Targeting

43 Pages Posted: 24 May 2021 Last revised: 27 May 2022

See all articles by Adam N. Smith

Adam N. Smith

University College London - UCL School of Management

Ishant Aggarwal

Lloyds Banking Group

Stephan Seiler

Imperial College Business School; Centre for Economic Policy Research

Date Written: May 2021

Abstract

We study the profitability of personalized pricing policies in a setting with consumer-level panel data. To compare pricing policies, we propose an inverse probability weighted estimator of profits, discuss how to handle non-random price variation, and show how to apply it in a typical consumer packaged good market with supermarket scanner data. We generate pricing policies from Bayesian hierarchical choice models, regularized regressions, neural networks, and nonparametric classifiers using different sets of data inputs. We find that the performance of machine learning methods is highly varied, ranging from a 30.7% loss to a 14.9% gain relative to a blanket couponing strategy, whereas hierarchical models generate profit gains in the range of 13â??16.7%. Across all models, information on consumers' purchase histories leads to large improvements in profits, while demographic information only has a small impact. We find that out-of-sample fit statistics are uncorrelated with profit estimates and provide poor guidance towards model selection.

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

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

Suggested Citation

Smith, Adam N. and Aggarwal, Ishant and Seiler, Stephan, Optimal Price Targeting (May 2021). CEPR Discussion Paper No. DP16096, Available at SSRN: https://ssrn.com/abstract=3846205

Adam N. Smith

University College London - UCL School of Management ( email )

1 Canada Square
London, E14 5AA
United Kingdom

Ishant Aggarwal (Contact Author)

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

Stephan Seiler

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

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