The most beautiful price fence

Fences are never beautiful. May be the picket fences are. But when designed to keep two sides from moving easily from one side to the other they are not usually described as beautiful. Price fences are as bad as say a fence between two countries. But they do serve the same purpose – to keep the two sides apart. Here is how a research article from 2009 defines price fencing,

market segments should be kept separate to prevent demand spillover from high priced segments to low priced segments and the associated revenue loss. Tools to restrict customer migration across segments are referred to as ‘fences’

 Price fences are key components of segmentation and revenue management. They are designed such that those who can afford and willing to pay higher prices are not tempted by the lower priced versions.

Let us take an extreme example from the early days of railroad transportation. Railroads are a high fixed cost business and the marginal cost of adding one more passenger was practically zero. They could have set the ticket price really low to fill every seat but that would be not capturing value from those willing to pay higher prices.

So they offered classes of service – small number of super premium first class service, moderately priced second class service and really low priced third class service. To prevent those who can afford second class service from being tempted by the low price of the third class service railroad operators removed roofs from the third class cars.

That price fence was not beautiful.

But here is some really beautiful price fence – comes from your favorite brand that excels in product design, Apple.

It is three different price points with right mix of features so carefully selected to let those who can and willing to pay higher prices from choosing the cheaper version. You may not see how impervious the fence is as you admire the beauty of the MacBook Pro. Let us dig deeper.

Between the $1,299 and $1,499 versions the differences are only in the RAM and flash capacity. Say you like the $1,299 version but just need more flash capacity. They are designed such that those with higher willingness to pay will choose the $1,499 version and pay the $200 extra.

You want the lowest priced version and try to customize your MBP with higher flash capacity. But guess what? There is no option available to increase just the flash capacity of your MBP. You can increase your RAM from 4GB to 8GB (the same level as the two versions on the right) for $100 more but cannot do that for flash  capacity. It is not hard for you to see that if RAM difference is priced at $100 the disk difference should also be priced and offered at $100.

Do not think this is a technical challenge. It is not, and it is offered as an option for another MacBook Pro – the non Retina version.

The MacBook Pro without Retina ships with hard-drive (the spinning platters kind) and if you want to customize it with SSD you would pay $200 more for 128GB and $400 more for $256GB. That is they want those customers to pay $200 for the same 128GB to 256GB upgrade.  So offering  just flash upgrade for Retina version  (for $100 as we saw above) would pose challenge to that $200 extra they charge for non-retina MacBook Pro version.

To state in simple terms, Apple’s price fences are not some isolated chain links but an integrated system of impenetrable walls that are passable only if you are willing to pay the same price where ever you decide to cross the fence.

They want $200 additional price  and they make sure they do it with price fences.

And go ahead and try to tell me that is not the most beautiful price fence you have seen.