Aligning Price With Value Received

There is huge outcry in the media – MSM and social media alike – on the imminent end to net neutrality. The recent tiff between Level 3 and Comcast kicked off this new round. There are a few neutral parties that make support Comcast’s pricing but mostly we see  the opposite.

Given that infrastructure is already there, its costs are already sunk and the pipes (or is it tubes?) already laid, should the carrier price differently for different customers and different traffic they place on the network?  Level3 accused Comcast of practicing price discrimination, as if it is an unlawful act.

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.

One way to look at this differential pricing is using classes of service in a railroad. But that does not do enough justice since the benefits from each class differ. To look at Level3 vs. Comcast tiff, let us go all the way back to 1831 when the first Manchester railroad helped drive trade. As a faster  mode of transportation, railroads made it possible to transport fresh food and farm animals to distances that were impossible with previous slower modes.

Manchester railroad’s first consignment was a batch of 49 “squealing Irish pigs” . The railroad charged the farmers 18 pence a pig.  Soon sheep were transported but at half the cost of 9p per sheep. Why the price difference? After all this is not a case of different classes of service.

One could argue that the pigs weighed close to twice as much as the sheep. In reality that was not the argument. At that time there were other alternatives available to transport sheep and the value from faster mode of transporting them was not significantly higher than that from alternatives. So different cargo, transported under same conditions, were charged differently based on economic value add to the customers.

So why shouldn’t the precious cargo of movies transported over data pipes be priced differently?

Why shouldn’t Level3 pay a different price than the others if the value it derives from using the carrier network is higher?

If you have trouble seeing the fairness, here are other examples of everyday price discrimination that we accept and  embrace:

  1. As an educated high-tech customer who uses latest browser like Chrome, you get cheaper rate on your credit card compared to those unfortunate who still use the browser that is pre-installed on their computers.
  2. You are most others are happy to pay $129 more for iPad 3G while Kindle 3G only costs $50 more for  the same radio parts.

Banning price discrimination is banning product  innovation.

If one price is good, two are better – both to the marketers and the customers.

Next up, since the value of electricity delivered to home is more to a customer using it to charge her plug-in electric car, should that customer be charged a different price than the rest of us?