New Pricing Technologies Help Small Businesses — But Overly Broad Legislation Could Ban Them

Small businesses often operate on razor-thin margins. Rising costs, economic uncertainty, and fierce competition mean there is little room for error when pricing goods and services. But setting the right price can be extremely difficult for small business owners.

A recent survey from Intuit QuickBooks found that accurately predicting costs and profit margins is the top operational challenge for small businesses. Similarly, a survey from Small Business Expo reveals how hard it is for small businesses to strategically align pricing with actual costs and market conditions — leading to pricing missteps that can hinder growth. When small businesses set prices too high, they lose sales; when they set prices too low, they erode their margins.

Today, new data-powered algorithmic pricing tools allow small businesses to make smarter pricing decisions based on key market and consumer information — helping them boost sales, improve margins, make smart decisions about offering discounts and promotions, and remain competitive. These data-driven pricing tools deliver clear value for small businesses. According to the Small Business & Entrepreneurship Council, 60% of small businesses already use or plan to adopt these tools, and nearly all (97%) report increased revenue after implementing them.

Unfortunately, lawmakers across the country are considering broad legislation that could limit the use of these extremely helpful pricing tools.

How Small Businesses Use Data-Driven Pricing

Many small businesses use data-driven tools to make better pricing decisions based on factors such as costs, inventory, demand, seasonality, and competitors’ prices. They also use customer data to offer targeted discounts and promotions. These tools can help businesses complete more sales, manage inventory, compete, and improve their margins.

A small online retailer, for example, might use software to lower the price of a product that’s not selling quickly, discount inventory that’s going out of season, or match a competitor’s sale price to avoid losing customers. The same retailer might send an abandoned-cart coupon to a shopper who didn’t complete a purchase or offer a promotion designed to encourage an existing customer to buy again.

There’s nothing new about businesses using basic data to make these kinds of pricing and promotional decisions. Small businesses have long adjusted prices based on changing input and operational costs, what competitors charge, and how much demand exists for a product. They have also long used discounts to attract new customers or close a sale. What has changed is that digital tools allow small businesses to make those decisions more efficiently and respond more quickly to changing market conditions.

Different Data-Driven Pricing Practices

Much of the current policy debate treats data-driven pricing — often referred to as “algorithmic pricing” — as a single practice. But the term encompasses very different uses of technology — from everyday, pro-competitive pricing activities to those that raise legitimate consumer protection concerns.

“Dynamic” pricing means adjusting prices in response to broader market conditions, such as demand, inventory levels, seasonality, shipping costs, or competitors’ prices. Such data-enabled adjustments help small businesses appropriately respond to changing market conditions, manage cash flow, reduce waste, and stay competitive.

Personalized discounts and promotions use limited customer information to offer consumers lower prices or special offers such as abandoned-cart coupons, loyalty rewards, or discounts based on past purchases. These practices can help consumers save money, while helping businesses complete sales and build customer loyalty.

”Surveillance pricing,” about which lawmakers most often express concern, involves the use of personal data to set individualized prices in potentially harmful ways — particularly by raising prices based on sensitive personal information, or information consumers do not realize is being used. Lawmakers have also expressed concern about algorithmic collusion or price-fixing, which involves competitors using shared systems, nonpublic data, or coordinated pricing strategies in ways that reduce competition.

These practices involve different kinds of data, used in different ways, to achieve different outcomes for consumers. But legislation aimed at addressing potentially harmful conduct is often written so broadly that it restricts commonplace pro-competitive, pro-consumer pricing activities alongside the harmful pricing behaviors policymakers aim to prohibit.

The Risks of Overregulation

Several states — including Pennsylvania, Maryland, California, New York, Illinois, Tennessee, and Colorado — have considered or are considering broad legislation that could significantly limit how businesses use basic, pro-competitive data-informed pricing tools. 

If enacted, these bills could make it harder for small businesses to:

• Set the right prices and respond to real-world conditions: Limiting how businesses use data — including basic information about customers and markets — could make it harder to figure out what a product should cost. That means more guesswork and a greater risk of pricing an item incorrectly.

• Offer discounts and promotions: Businesses have long offered new and returning customers promotional pricing and special deals. If legislation broadly restricts data-informed pricing, small businesses could have a harder time offering promotions such as abandoned-cart coupons, personalized discounts, and loyalty offers.

• Compete on a level playing field: Small businesses in states with restrictions would face a competitive disadvantage because rivals in other states could continue using data-powered pricing tools. Large companies would also likely be better able to navigate complex legal requirements and adapt, leaving small businesses behind.

• Manage compliance costs and challenges: Small businesses don’t have large legal or compliance teams. Vague rules, complicated disclosure requirements, or the threat of private litigation could force them to spend more time and money ensuring their pricing practices comply with the law — or abandon those practices altogether.

Conclusion

Policymakers should always work to stop truly unfair or discriminatory pricing practices. No one should face illegal discrimination — in pricing or any other area — based on protected characteristics, and existing laws already prohibit that conduct.

But using data — including basic customer and market information — to inform pricing decisions is a standard part of how businesses operate.

Data-powered pricing tools help small businesses identify prices that work both for their customers and their bottom line — helping them offer appropriate discounts, make sales, and stay competitive. 

Lawmakers should reject proposals that would restrict beneficial data-powered pricing tools and hurt small businesses. Instead, they should support policies that allow small businesses to price efficiently, compete fairly, and continue serving their customers and communities.