The Ethics of Price Discrimination with Rags Srinivasan – 064

Rags Srinivasan is an engineer, turned pricing consultant. His epiphany came when he realized it is not about costs. Nowadays, he leverages an analytical approach on pricing. He has an MBA from the Haas School of Business at Berkeley, where he studied with Teck-Hua Ho. He is an avid hiker and said that if it is not longer than 8 miles, it is not worth doing.

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The Customer's Value Perception

• What is the most important thing you can share about pricing?
  • There are no pricing problems; only segmentation problems.
  • Think about your end-customer first.
  • Value is in the perspective of the person with whom you are talking.
  • The value changes in context as well.

• How does “list price” communication value?
  • Price is the method to capture value added by a product. The most common way to indicate prices to the customer is the list price, be it price tags in retail or invoice price in B2B transactions. – What is Price Realization?
  • When you purchase a mattress, you do not do the math on how much you are going to sleep and how much per hour you are willing to pay.
  • The list price is the high watermark that a customer needs to put in their mind.
  • Demonstrating different choices at different prices helps to educate the customer on the value.

• How does a price war destroy value?
  • War results in destruction and casualties and price war leads to value destruction. – Dropped Mobile Profits
  • There is a misconception of success when you capture market share.
  • The causation effect is lost in the minds of people during a price war.
  • Market share at any cost is chasing the wrong target.
  • Which comes first, market share or profit?
  • Profit comes first as it creates value for the customer; value comes first.

Price Discrimination: Good and Bad

• How does price discrimination help the customer?
  • Our Global economy depends on practicing price discrimination, in fact, it is arguable that without price discrimination some of us won’t be able to avail ourselves of certain products, including life-saving prescription drugs. – Aligning Price with Value Received
  • Price discrimination should be rebranded as price homogenization.
  • Almost every customer values a product differently.
  • If you provide a product that is the same price to all customers, 90% of them will not see the first for their needs.
  • In India, if you want to buy a name-brand drug, almost none of the people can afford it.
  • If it is a generic, it appeals to more people.
  • The ones who can afford it can still purchase the name-brand.
    

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  • Price discrimination is not about squeezing every bit of consumer surplus from every customer (in one model it is). It is about getting customers to willingly pay the price they can pay and still feel happy about it. – Price Discrimination At The Altar of God – Revisited
  • If you take away the customer's choice, you are not practicing good pricing discrimination.
  • Let your customers self-select.
  • It is a $25 flat fee to have a Lexus or Corolla blessed at a Hindu temple.
  • The value of the ceremony is different to each owner.
  • The temple should offer the car owners three blessing options at different prices and let them decide.
  • You can light a candle at Notre Dame Cathedral for $0, but you are encouraged to leave donations.
  • Good price discrimination is practiced by providing small, medium and large decorated versions of the candles with price suggestions, setting an anchor for a donation.

• Is charging difference prices for a haircut by gender good or bad?
  • Good and Bad Price Discrimination sites a bad example as setting prices for haircuts by gender.
  • The provider is looking at it from a cost perspective because cutting a woman's hair takes longer.
  • Providing different levels allows the customers to self-select.
  • While a “buzz and saw” will likely appeal to men, you are not taking the choice from any customer.
  • When you set a forced price for a woman, you are setting a price boundary that a man cannot cross.
  • Any time you take away from the choice of the customer you are practicing bad price discrimination.

Versioning: A Price Discrimination Tool

• Can you explain the ethics of price discrimination?
  • Therein lies the tyranny of versioning. If one price is good, two are better but how you do it may not always be right. A versioning strategy that is profitable is not enough. – The Tyranny of Versioning
  • What can you do to prevent adverse self-selection for passengers on a train choosing between second- and third-class cars?
  • Removing the roof or chairs from the third-class cars raised an ethical question because the trains were maximizing their profit at the expense of delivering fair value to customers.
  • One size does not fit all – pricing is a practice.

• Why did Telsa choose to omit a price (option) for a car?
  • Simple Price-Value Math from Tesla shows how vehicles with different features can provide options.
  • You do not want to have offer too many combinations.
  • Standard vs. all-wheel drive vs. battery life are the two options offered, to see where the customer gravitates.
  • 4 Costs of Versioning explains how being able to offer an option does not mean you should.
  • Offering too many options can be a mental drain on the customer.
  • Do not offer a version at the cost of ethics.

• Debbie Hudson – What is the difference between a $1 coffee mug and a $15 coffee mug?
  • The difference is in the mind of the customer and the context of the offering.
  • When you are paying $15 for a school fundraiser, you are paying for more than the mug.
  • Products do not stand in isolation.

• What is one of your best stories about creating value for a customer?
  • Five years ago, he was working with a customer to help decide how to price a SaaS product.
  • The challenge was that there was no product like it on the market, so everyone gravitated to things that already existed.
  • He suggested defining the segmentation first and then asking the customer what value they were going to get from it.
  • Once he helped with value mapping, there was a clear option of what the price should be.
  • He reframed the story and helped them get a better customer focus to determine the right price.

About Rags Srinivasan

• Website: iterativepath.com
• Twitter: @rags