Snail Slime Facial Gender Based Price Discrimination

Let us recap the news item. A spa in Japan offers Live Snail Facials – For $350 you can have five snails slink all across your face. It is a painful process even though it lasts only five minutes.

Who is the customer? Almost all women. Here is what the spa says about catering to men,

The service attracts a mostly female clientele in their 30s to 50s, and although men can also opt for the live snail treatment, none have done so yet. “I’ve observed that women will endure more pain and fright than men, if it’s for beauty,”

Let us set aside the fact that this non-scalable , one customer per day, service is not really the product. Let us ask, if this were a real product, if the spa would like to expand its market to men, what should it do?

Say men have less tolerance for pain when it comes to beauty. Could the spa offer lower price to men to help slime grease the wheels? That is overt and egregious price discrimination. A no no!

While price discrimination is good, gender based price discrimination is NOT. So how can it put to practice an effective and fair price discrimination?

Two options – none of these need any gimmicks – both are tried and tested and rooted in economic principles

  1. Bundling – Offer couples package
    Remember bundled pricing works when customer preferences are negatively correlated. Set a price that represents the sum of the higher and lower value perceptions of women and men. Say a $550 couples package could work. The man would think his cost is $200 while the woman would think her cost came down from $350 to $275.
    Besides the couples package will help drive more customers as women bring their partners, like this Candy store CEO says.
    Sure you give some consumer surplus in cases where both people value it at full price. As long as that lost revenue is smaller than what is gained from serving more customers with the bundle you should do it.
    For complete fairness, you should offer the couples package to any couple.
  2. More Product Versions
    Create an express version – 2 minutes for $200. That helps assuage men’s concern for pain and fright. And the lower price is attractive too. Brand it to signal something other than the best so women are less likely to choose it.
    As long as you are creating versions, create another premium version, there exist customer segments willing to pay more and you should capture that.

Both these options implemented together would work as well.

There you have it – Live Snail Price Discrimination done fair and square.

Is prix fixe the path for restaurant revenue optimization?

No restaurants are more laid back than those remote non-touristy ones in Italy. You get a table, it is yours until they close for the night. I remember pleading with the waiter at 1130PM for the check.

Me: Signore, il conto por fovore (delivered really badly)

Waiter: il conto domani!

Sure enough I did not get the check until 00:15. To me this screamed of the need for revenue optimization.For a restaurant, revenue optimization is all about maximizing the spend per table. It can come from two sources
  1. Increase the number of times the table turns over
  2. Increase the spend per table
From the moment the customers are seated to the time they leave the goal for any restaurant should be to ensure that the table is generating revenue.When you look at the tables at a restaurant, different tables generate different revenue even for same amount of occupied time. Since different customers have different willingness to pay, each choose to spend different amounts during their stay. Providing a menu of options at different price points achieves this price discrimination but also means difference in revenue generated per table.Wouldn’t it be great if a restaurant can get same high revenue from all its tables? What if it let in only those with the same high willingness to pay? In addition what if the restaurant took away the temptation to spend less by taking away the menu?

One restaurant in New York is trying to do just that with prix fixe menu.

Is that the path for  revenue optimization?

It is not for two reasons. One it leaves out those customers who can still be profitably served and two it leaves out up-sell opportunity. Not only do different customers have different willingness to pay, even the same customer has different willingness to pay based on purchasing occasion.

We will never know how many potential diners avoided us because of the prix fixe, or how many were displeased but too civilized or bashful to say something. All in all, check averages increased and traffic remained steady.

It is better for a restaurant to settle for lower revenue from a table as long as it is higher than the opportunity cost. For example, it is profitable to serve a customer who spends $30 if there is a 50% chance the table will remain unoccupied and 50% chance of seating a $55 customer.

So should a restaurant ever do prix fixe menu?
  1. It can if it is offered alongside a la carte option so it is not the only option and customers self-select.
  2. On specific occasions when they are capacity limited and want only those with high willingness to pay to visit (e.g., Valentine Day dinner and New Year Dinner at special high prices).

Otherwise I do not recommend prix fixe menu because even for restaurants, if one price is good, two are better.

The Danger of Throwing in a Freebie

Southwest steadfastly refuses to charge for bags (at least the first two bags). Their marketing campaign, “Bags Fly Free”, says it all. In the short run they are missing out on the profit from baggage fees. The total airline industry profit from baggage fee for last year was around $536 million. Southwest is betting on increasing capacity utilization by attracting and keeping customers who are fed up with all the extras while other airlines are training the customers to pay for the extras.

Before airlines started to unbundle their services customers viewed the service as a monolith as opposed to a “bundle”. My monolith, I mean, a product service that is marketed and perceived as one entity even thought it is made up of different components. A bundle, on the other hand, is put together from several components, is marketed as a sum of its parts and is perceived by customers as such.  Unbundling has changed the perception of airline travel from a monolith to a bundle – a bundle consisting of:

  1. the main component – the ticket
  2. convenience of paper ticket
  3. convenience of seat selection
  4. ease of boarding
  5. check-in bags
  6. and in one extreme case – use bathrooms

So what Southwest sells with its “Fees Don’t fly with us” is a bundle in which every component of the bundle except the ticket is marketed as free. What is the danger of throwing in freebies with bundles? According to consumer behavior researchers from three universities, who published their results in Journal of Consumer Research, April 2009,  it is the long term erosion in customer willingness to pay for individual components.

Authors Michael A. Kamins (Stony Brook University-SUNY), Valerie S. Folkes (University of Southern California), and Alexander Fedorikhin (Indiana University) found that describing a bundled item as free decreases the amount consumers are willing to pay for each product when sold individually. They call this the “freebie devaluation” effect.

Why does a freebie decrease the price consumers are willing to pay for each individual product? Our research shows that consumers tend to make inferences about why they are getting such a great deal that detract from perceptions of product quality,” the authors explain. “For example, consumers figure the companies can’t sell the product without this marketing gimmick.” [quote Source].

In the case of Southwest’s bundle in which everything but the ticket is free, the research implies that customers will expect lower ticket prices if they want only parts of the bundle. A customer who is not checking in bags, in essence, is purchasing only one component of the bundle but is paying for the entire bundle. The “freebie devaluation” effect will push down customer’s willingness to pay for tickets when they do not need to check in bags.

What does it mean for Southwest? Unless their customer travel indicate that most customers check in bags they run the risk of lower ticket price expectations from their customers, further depressing their profits.

What does it mean to other marketers who throw in freebie? The same research provides the answer – there is no difference in customer willingness to pay for the bundle whether or not one or more of its components are marketed as freebies. So resist the temptation to increase sales by either throwing in freebies. If you are offering a bundle – you might as well price it same as the sum of the prices of the components.


Pricing the Bundle

How should a marketer price the bundle? This is one of the questions in a quiz posed by Mr. Reed Holden, one of the authors of Pricing with Confidence, in his website to test a marketer’s Pricing Quotient.  The multiple choice questions offers four choices

20.  When bundling products for a solution, companies should:

Give the services away for free
Price the solution higher than the component offerings
Price the solution lower than the component offerings
Price the solution equal to the component offerings

My answer is, there is no one answer.  It depends on the bundling method, customer demand and the market. The answer requires analysis to find the option that maximized profit. I will discuss this with examples, but first some definition:

Bundling: When  marketer sells two or more items of the same or different type as one bundle at one price.

The bundle can be one of the following three cases,

Case 1 – Multiple instances of the same widget:

Like a two pack milk or dozen soap bars, the marketer gives quantity discount to their customers. In this case the bundle is priced lower than the sum of the price of individual components. The pricing is based on demand schedule – customers may have high willingness to pay for single instances but not for multiple instances, hence the pricing discount to match customer willingness to pay.

In addition the marketer may want to price the bundle lower to thwart of competition. For example, in retail new product entry scenarios P&G may give away two pack Head and Shoulders at the same price of single unit if it knows Unilever is trying to introduce a new product. This results in soaking up customer demand and takes them out of the market for sometime. In such cases the additions are given away for free.

There is an interesting variation to  bundled pricing, it comes from a story quoted by Steven Levitt, author of Freakonomics, on pricing for  hair braiding. Levitt wrote about pricing at a hair braiding salon which had the following pricing posted:

3 braids: $10.

6 braids: $22.

Each additional braid: $4.

This is indeed an unusual pricing schedule where the price for the bundle of multiple instances of the same are priced higher than the sum of prices of individual instances. But there is a valid explanation for this, I will discuss this again in Case 3 below.

Case 2 – Bundle of different components with no integration:
The most commonly quotes examples here are Opera season pass or pairing of complementary offerings.  The bundled components are not integrated in any other way. The bundle with lower price than the sum of the individual prices will return higher profit than any other option when there are multiple customer segments with different preference for each component. In fact the customer preferences must be negatively correlated to each other (i.e., if we assume for simplicity there are only two customers 1 and 2 and only two components A and B, then if customer 1’s WTP for A is high then it should be low for B  and vice versa for customer 2).

There is a kind of loose bundling like the one practiced by For example, when you search for Mr. Holden’s book, Pricing with Confidence in, Amazon will offer “Frequently bought together” bundle, combining other Pricing related books (Sidebar: I strongly recommendamazon_bundle one of the book in the bundle, Strategy and Tactics of Pricing).

The price of this recommended bundle is exactly the sum of the price of the three books. There is no reason for to give a pricing discount because this is just a “Nudge” and none of the conditions required to price the bundle lower exist.

Case 3 – Bundle of different components with integration:

In this case, the marketer provides an additional service, integration. For example, when buying computer systems, there is value to customers in buying a pre-configured and tested system that just works. Think Apple. Here the profit maximizing price for the bundle is one that is higher than the sum of the prices of components. Technically we should look at this additional service as one of the components of bundling and if it is of value to customers then the marketer should charge for it. Conversely, since the customers who buy the components separately perform their own integration, they must be compensated for it in the form of lower price.

Going back to hair braiding example from Steven Levitt, why did the salon price multiple braids at higher price? There is probably value to customers in getting the braids done at one sitting and by one hair braider for consistency and style. The customer also saves  time from waiting and gets more utility. In other words, the braiding example is Case 3 where the added component is integration. Hence the marketer should price the bundle higher.

By the way, why is the hair braider charging more per unit after the sixth braid. Simply based on customer willingness to pay. There is a difference between a casual customer who just wants a few braids for curiosity and hence usually has low willingness to pay vs. a dedicated customer who wants a head full of braids. The latter has higher utility and hence being charged a higher price. By the way, the cost to the hair braider is irrelevant to the argument except if it is the opportunity cost of losing casual customers.

The net is pricing a bundle is not a straightforward answer. A marketer needs to know the demand schedule, customer preferences, customer segments, and value add from bundling. The correct price is the one that maximizes profit.