Multi Version Pricing – Print and Online Newspaper

I came across the pricing list for print and online versions of The  Newport Daily News through Consumerology blog. The most interesting aspect of their pricing is how they priced the online only version (highest) vs. online plus print combo (lower). Why would they give away the version that includes print newspaper at lower price than online only version? The reasons could be:

1. Their online Ad revenue may not be significant and advertisers do not think the readers respond to the Ads. Hence they want to compensate for lost revenue opportunities.
2. There are additional revenue opportunities from print version, for example different types of Ads, inserts etc
3. More people read the print version, either within households or it is bought by local businesses for their customers. In addition readers may spend more time reading the newspaper. Together these two factors increase the Ad reach and hence the price Newport Daily News can charge their advertisers.

But this pricing is unsustainable due to following reasons:

1. Since the combo price is lower, those who prefer online version will buy this version and may simply throw away the print version. While the newspaper may claim higher “print impressions” with their advertisers, there is no net increase in reach for the advertisers.
2. The pricing also goes against customer expectations and assumptions – customers believe online only version should cost lower than print version because of cost difference. To a marketer cost has nothing to do with pricing which is purely based on value, but customer perceptions set a low reference price for online only version. This low reference price prevents the marketer from capturing all the value.

The Newport Daily News may now be employing behavioral economics to nudge customers to pick the print only or the print + online combo over the online only version, but sooner or later they are going to find resistance or backlash to their high priced online only version.

Amazon.com – Managing Reference Price

It is not news when I say that Amazon.com offers free shipping on orders of $25 or more. But there are two very interesting things I see in how they implement that offer:

1. The free shipping option is a less convenient option. The offer states that it will take 5-7 business days compared to 3 business days for the next lowest priced standard shipping option. The shipping charges are not different but  Amazon manages customer perceptions of the service by signaling that it is the slowest of all options. Whether or not it would take 5-7 days is immaterial.
2. When a customer checks out the check out page very clearly shows the shipping charges  and subtracts the same from the total price. This is about managing customer reference price for shipping. Amazon wants to say that shipping is not really free and signals the customers that they would have paid , for example $5.47, if not for the the promotion.

This is about managing customer perception and reference price. They do not want the customers to think that price for shipping is $0. Maintaining a non-zero reference price  enables amazon to start charging for this lowest option when they need to without causing customer backlash (like the one airlines faced with drink fee).

Improving Customer’s Perception of Service Delivered

Consider the following two scenarios

1. A service that consistently provides  good service. Nothing ever goes wrong, it just works.
2. Almost same as above with some exceptions. Once in a while something goes wrong, be it a service failure or over-billing. But as soon as the customer calls it is resolved right there, be it resolving service failure or  removing  $300 over charge without further questions.

In which of the two scenarios will a customer feel they are getting better service? Do  occasional problems and their immediate resolution improve a customer’s perception of the overall service?  Previous studies have shown how recency and intensity affect our perception and recall. Could these be applicable in this case?

From another perspective, is the presence of both good service and bad service increase a customer’s utility more than just good service? We saw the work of Wertenbroch and Dhar that found that utility from consuming virtue increased in the presence of vice options. Here the customers are not making choices but the choice is made for them, nevertheless customers are reminded of the  “vice option” and steered back to “virtue option”.

Price Realization Through Creative Package Sizes

[tweetmeme source=”pricingright”]The most common type of price realization method employed by CPG brands is using creative packaging to reduce the amount of product for the same price. We seen examples of this from Cadbury and Haagen Dazs. If you walked by ice cream aisle and looked at Haagen Dazs (14 oz)  and Ben and Jerrys (16 oz) you would not be able to tell the difference. What is the best possible way to  change package size so the customers won’t notice it? Chandon and Ordabayeva, researchers from INSEAD, did experiments on customer perceptions of package size   changes and conclude that, “Downsize in 3D, Supersize in 1D” (pdf). From the three experiments they conducted they found

that changes in size appear smaller when products change in all three dimensions (height, width, and length) than when they change in only one dimension

 

Wider base and Shorter height

 

There is another not so uncommon practice of creative packaging for price realization that seem to have taken the lesson from Chandon and Ordabayeva and applying it to extract more revenue per customers. I came across a frozen yogurt chain called Tutti Frutti  that in theory does unbundled pricing, selling yogurt and toppings per ounce. They charge a flat price of  35 cents per ounce. They give you a choice of containers and ask you to serve yourself any of the flavors and toppings available. The fun is in letting each customer serve themselves and in the container design (shown left).

Their intention, I surmise, is to maximize price paid by the customer every time they make a purchase. One way is to get a customer to purchase more than they intended which can be achieved with a container with wider  cross-sectional dimensions (radius) and shorter height.

Does this work? In a 2003 study,  professor Wansink of Cornell  did experiments “to determine whether people pour different amounts into short, wide glasses than into tall, slender ones.”  He found that “both students and bartenders poured more into short, wide glasses than into tall slender glasses”. So it does work. Professor Wansink is also the author of the book, Mindless Eating and  writes a blog on healthy heating habits.

Won’t consumers figure this out? Is this a viable way to increase customer revenue per visit? No, definitely not. Judging from the comments in Yelp on Tutti Frutti people figured this out. The first time a customer buys she is going to be shocked to see the bill, as one Yelp reviewer noted her surprise from a $8.5 charge for a container. But from next time on they are bound to be more careful in pouring yogurt into their cups.

Pricing When Cost To Serve Is $0

What do amusement parks, airlines, hotels, baseball games, and  theaters  all have in common? Two things, first their capacity cannot be stored for future use and second the cost to serve one additional customer (marginal cost) is $0.  Once a plane takes off, all the empty seats in the plane expire, generating no revenue for the airline. How should a business price its service that falls in this category? Just because the marginal cost is $0 and the lost revenue opportunity should the excess capacity be sold at the lowest possible price?

There is a renewed focus (in the echo chamber of blogosphere), almost an obsession, with marginal costs and the fact that it is “spiraling to $0” for digital goods. Wired magazine editor, Mr.Chris Anderson, has been talking and writing about this and has a book coming in July. Before we go further I would  like to reiterate that what it costs to produce a product/service does not matter in how it is priced and higher capacity utilization is not a valid reason for lowering prices.

The answer to the pricing question lie in:

1. Opportunity Costs: The cost to consider is not the marginal cost but the opportunity cost of admitting one additional customer – that is what is the lost revenue opportunity from selling one airline seat now at a lower price. Only airlines excel in implementing this pricing strategy that is based on yield management.
2. Value: That said, the business should look at the value created for the customer using the service. It is common sense that a business makes profit not just by creating value but by capturing some of it.  Note that the value created is different for different segments (technically it is different for each consumer but it is hard to quantify).
3. Reference Price: Businesses must consider the impact of low (or zero) price now on future profits due to the reference price effects. Once an airline sets a very low price or allows a customer to travel free because the cost is $0, then it risks setting a very low reference price in the minds of customers.  In the future, such customers will despise paying regular prices and may even be up in arms. The effect of reference price cannot be understated, despite the value added to consumers the reference price prevents the business from capturing a fair share of the value added.

Do you know your opportunity costs, value created and the reference price? Please use trackbacks to comment on this.