Retail store with products forming customer's brain outline, symbolizing personalization.

Is Personalization Worth It? Unveiling the Limits of Tailored Assortments

Nico Varela in Business & Economy December 2025 • 4 min read.

"Dive into the economics of personalization and discover when tailoring products to individual customers actually pays off—and when it doesn't."

In today's e-commerce landscape, personalization is king. Online retailers are constantly striving to offer tailored product assortments based on individual customer data, from browsing history to past purchases. But is this relentless pursuit of personalization always the best strategy? A new study sheds light on the limits of personalization, revealing surprising insights into when it truly pays off—and when a more generalized approach might be more effective.

The core question is this: How much can a company really benefit from personalization? To explore this, researchers have introduced the concept of a 'clairvoyant firm'—an entity that knows exactly what each customer is willing to buy. This hypothetical firm serves as a benchmark, allowing us to measure the performance of traditional assortment optimization methods against the theoretical maximum revenue achievable through perfect personalization.

This exploration isn't just about maximizing profits; it also touches on important societal considerations. As personalization becomes more prevalent, regulators and consumers alike are asking whether these strategies are truly beneficial or potentially exploitative. Understanding the limits of personalization helps us navigate these ethical and practical dilemmas.

The Clairvoyant Advantage: How Much Can Perfect Personalization Really Boost Revenue?

Retail store with products forming customer's brain outline, symbolizing personalization.

Imagine a store that knows your mind. The 'clairvoyant firm,' can offer each customer their ideal product. This model helps establish an upper limit on the benefits of personalization. By comparing this ideal scenario with traditional methods, we can gauge the true potential—and the real-world value—of personalization efforts.

The study uses mathematical models to analyze various customer choice scenarios. These models, which include everything from basic rational choice to more complex frameworks, predict how customers will respond to different product assortments. By analyzing these models under the 'clairvoyant' lens, researchers can determine the maximum possible revenue uplift from perfect personalization.

Rational Choice Models: Used to simulate customer behavior and predict responses to product assortments.
Revenue-Ordered Assortments: A traditional approach where products are offered based on their revenue potential.
Prophet Inequalities: Mathematical tools used to compare the performance of different assortment strategies.

The research reveals some surprising limits. For common choice models like the Multinomial Logit (MNL) model, often used in e-commerce, the clairvoyant firm can only earn up to twice the revenue of a traditional firm. While this is still a significant boost, it demonstrates that the potential gains from personalization aren't unlimited. However, other models suggest personalization can increase revenue by n times, where n is the number of products. This highlights that the benefits depend heavily on the specific customer choice dynamics at play.

Beyond the Hype: Practical Implications for Retailers

The study's findings have important implications for businesses. While personalization can be powerful, it's not a magic bullet. Retailers need to carefully consider the costs and benefits of personalization efforts, focusing on strategies that provide the most significant return on investment. Understanding the limits of personalization can lead to smarter, more efficient business decisions.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2109.14861,

Title: The Limits Of Personalization In Assortment Optimization

Subject: econ.th

Authors: Guillermo Gallego, Gerardo Berbeglia

Published: 30-09-2021

Everything You Need To Know

What is the 'clairvoyant firm' and why is it important in the context of personalization?

The 'clairvoyant firm' is a hypothetical entity that perfectly understands each customer's preferences and knows exactly what they are willing to buy. It serves as a benchmark to evaluate the potential revenue uplift from perfect personalization. By comparing the performance of traditional assortment optimization methods against the revenue achieved by the 'clairvoyant firm', researchers can assess the true value and limitations of personalization strategies. This helps businesses understand the upper bound of potential gains from personalization efforts and make informed decisions about resource allocation.

How do different customer choice models influence the effectiveness of personalization?

The impact of personalization varies depending on the customer choice model used. The study mentions the Multinomial Logit (MNL) model, common in e-commerce, where the 'clairvoyant firm' can earn up to twice the revenue of a traditional firm. However, other models show a potential revenue increase of *n* times, where *n* is the number of products. This demonstrates that the benefits of personalization are not uniform and are significantly influenced by the specific customer choice dynamics and the underlying assumptions of the model used to predict customer behavior. Different models, such as basic rational choice models, can also affect how customers respond to product assortments. This highlights the importance of selecting appropriate models when evaluating personalization strategies.

What are 'Revenue-Ordered Assortments' and how do they relate to the study's findings?

'Revenue-Ordered Assortments' represent a traditional approach to product assortment, where products are offered based on their potential to generate revenue. The study uses this approach as a comparison point to understand the revenue gains from personalization. By contrasting the revenue generated by 'Revenue-Ordered Assortments' with the revenue achieved by the 'clairvoyant firm', researchers can quantify the benefits of personalization strategies. This comparison helps retailers evaluate whether the investment in personalization efforts yields a significant improvement over established methods.

In what ways can understanding the limits of personalization benefit businesses and society?

Understanding the limits of personalization helps businesses make smarter decisions about their strategies. It allows retailers to carefully consider the costs and benefits of personalization efforts, focusing on those that offer the best return on investment, and avoid overspending on strategies that yield minimal gains. From a societal perspective, understanding these limits helps in navigating ethical considerations, such as whether personalization practices are exploitative. This knowledge allows for more informed discussions among regulators and consumers, ensuring that personalization strategies are beneficial and do not unfairly target individuals.

What are 'Prophet Inequalities' and how do they contribute to the study's analysis of personalization?

'Prophet Inequalities' are mathematical tools used in the study to compare the performance of different assortment strategies. They help researchers to evaluate and benchmark various approaches to product assortment. These inequalities provide a framework for quantifying the relative effectiveness of different strategies. They are useful in comparing 'Revenue-Ordered Assortments' and other traditional methods against the 'clairvoyant firm' to gauge the potential benefits of personalization. They aid in determining the maximum possible revenue uplift from personalization, allowing for a comprehensive assessment of the value that tailored product assortments can provide.