Socialize More, Pay Less : Randomized Field Experiments on Social Pricing

Recently, a growing number of online retailers have started meshing their pricing strategies with consumers' social networks. Specifically, they have started allowing consumers to invite peers from social media to request a discount for their purchases. We call this pricing strategy social pricing, under which consumers with higher social capital can enjoy a better price. Conceptually, social pricing enables firms to achieve price discrimination based on a consumer's social network value. This is in sharp contrast with traditional price discrimination, where price differentiation typically hinges on consumers' individual willingness to pay. Although social pricing has been popular in practice, whether it works, why it works, and how it works remain unclear due to a lack of rigorous academic research. To address this gap, we design and conduct two randomized field experiments on a leading online fresh food retailer to understand the value and mechanisms of social pricing. Social pricing has been commonly credited for its effectiveness in new customer acquisition. Interestingly, our study reveals that it is also highly effective on existing consumers. Our analysis shows that social pricing can increase an online retailer's profit by 40% solely from existing consumers, compared with regular firm-offered discounts. Exploration of the underlying mechanisms reveals that reciprocity is the main driver here, which not only helps to increase purchase frequency but also induces higher order value per purchase. We find that reciprocity leads to homophily-based social pricing such that similar consumers cluster and request discounts for each other. In the follow-up experiment, we further vary the structure of social pricing by requiring only heterophily-based social pricing. The results suggest that a heterophily-based strategy can further amplify the benefits of social pricing. In summary, our study conceptualizes a novel pricing scheme, social pricing, and provides valuable guidance to both researchers and practitioners by offering actionable insights regarding the design of social pricing strategy