The Perils of Behavior-Based Personalization

• Published in: Marketing science (Providence, R.I.) Vol. 30; no. 1; pp. 170 - 186
• Main Author: Zhang, Juanjuan
• Format: Journal Article
• Language: English
• Published: INFORMS 2011
• Series: Marketing Science
• Subjects: behavior-based personalization; behavior-based price discrimination; competition; customer relationship management; endogenous information generation; revealed preference; segmentation; targeting
• ISSN: 0732-2399; 1526-548X
• DOI: 10.1287/mksc.1100.0607

"Behavior-based personalization" has gained popularity in recent years, whereby businesses offer personalized products based on consumers' purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day 1, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day 1, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms' better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.