June 12, 2012
Another of my recent reads is The Price of Everything by Eduardo Porter. I won’t attempt to debate heady chapters on the value of a life, or why American’s tip but Brits don’t, however there are a couple of interesting thoughts.
The price of search is one way to justify differentiated pricing. People value time differently, with the lawyer who earns $500 an hour less likely to burn an evening hunting for a bargain than the janitor on $20 an hour. Hence the same T-shirt from China can be priced very differently in the 5th Ave Brooks Brothers than the Hoboken Wal-Mart. Even within the same store, a retailer can cater to the banker in a hurry, and the grandmother on a fixed income. How? Coupons: effectively discriminating against the time-poor by requiring complex unpaid labour in locating the newspaper and cutting the coupons. Those who identify themselves as willing to do this to save 45p on a six-pack are flagging themselves as price-sensitive, self-selecting for their own segment.
Another variation on this self-selection is along product mix. If you sell a product such as an information service, software or music which has little variable cost (and also at risk of theft by piracy) then you need to get customers to indicate their price points. This can be done by having graduated product offerings all the way from free to premium, with inducements to move up the value chain. Consumers sort themselves into different groups according to willingness to pay: the producer chooses the versions so as to induce the consumers to self-select into appropriate categories. Examples of companies who do this are banks (Free Checking, Monthly Fee, Private Banking) or a music service like Spotify (Free, Unlimited, Premium).
As with many of these books, the B2C examples can seem a little “just-so,” and not always relevant in the B2B world, but I think there are a couple of things we can learn. First is that any ability to tap into understanding of willingness-to-pay will give a significant lift in profitability. In B2B one way to do this is to look at customer satisfaction data: this is often gathered by a completely different departments and often not correlated by pricing teams. Second is that by dividing up your product portfolio, you can find additional price points. This doesn’t require your engineering department to create more products: Pricing teams can create “products” by changing usage terms, bundling or unbundling.
I’ll leave it there, and not comment on the other, more controversial themes of the book which has chapters on The Price of Life, The Price of Faith and The Price of Happiness. For now I’ll focus on the Price of Stuff, and leave the others to my pastor.
– James Marland