Version Design – How to keep customers from being tempted by your lowest priced version?

Here is what a cleaning service offered me as my options

  1. Weekly cleaning schedule at fixed time at my convenience,  $60/per visit
  2. Biweekly cleaning schedule at fixed time from available choice of time slots, $90/per visit
  3. Monthly cleaning schedule, no fixed time, will call days before to set day and time, $130/ per visit

I am not going to reach to big conclusion here on carefully designed price discrimination and versioning design that we all can learn from. It could be that case but it is more likely done due to some operational constraints.

But the bigger point is, if you offer multiple versions of your product you need to understand first what your different customers value and setting a price based on this value distribution. Value to customers comes not just from the product but from many related factors like easy of buying, convenience, ease of consumption etc.

It may very well be the same product but you sure can offer multiple versions based on these other dimensions.

Now if only the dry-cleaners switch from price discriminating on gender to offering versions based on convenience, time to clean and pickup options.

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.

Charging Different Prices for Men and Women’s Toilets

Portable toilet
Portable toilet (Photo credit: Wikipedia)

In my last article about the German supermarket sausage pricing I asked you to conduct a thought experiment  — If you were to charge different prices for men’s and women’s toilets how would you implement it such that it won’t cause customer backlash (labeled as bad price discrimination or worse gender discrimination) and helps you maximize profits (effective pricing)?

Is it simply loo-dicrous?

Let us do the thought experiment (keep that in mind for the rest of the article and do not see this as my position on this).

First the definitions.

Price Discrimination is using multiple levers to charge different prices for different customers to ensure those who can pay higher prices will do and hence maximize your profit.

Good Price Discrimination is where customers have choice and control and are not forced to act on marketer’s will. Good Price Discrimination is something that is not seen. No one notices that marketer is trying to maximize their profit and willingly pay higher prices. Like you choosing 13″ MacBook Air with 256GB.

Effective Price Discrimination is where those who can pay higher prices do so and are not tempted by your lower priced options and the profit is more than what you would have had without price discrimination.

Net result is capturing additional profit from your customers that they willingly give up.

What about pricing men’s and women’s toilets differently?

First hurdle to cross here is the reference price. If customers have never paid for toilets before and expect it to be part of whatever service you offer, their reference price is zero. Luckily reference price is malleable. One way to do that is using options as I show in this work below,

The next obvious hurdle is the question of customer choice and control. You cannot charge different prices for the two different toilets if they are separated in usage by respective genders.

That means designing products that are separated by the values they offer and not based on customer gender. A higher priced premium toilet and lower priced basic one. As long as you provide basic features like privacy and safety (may be make it single person stall with protection), that makes it as good Price Discrimination.

Now to make it effective you need to ensure

  1. the premium version is designed based on what customers value and are willing to pay for
  2. the basic version is not full featured that it adds too much value making premium version unattractive (see value step function)

If you intentionally want to nudge women to pick the higher priced version  (for whatever reason, remember this is a thought exercise) you need to add features that would

  1. turn-off women from choosing cheaper basic version
  2. turn-off men from choosing premium version (nothing wrong if men want to pay premium price but you can get better separation in customer mix and hence better value perception if you can achieve this)

Step 1  is like removing roofs from third class train cars.  May be you could brand the basic version with such revolting name that men will pick it but women won’t. May be you can remove a feature that is not essential but women will find important.

Step 2 is hard. I will once again recommend branding lever here, choosing a brand that will turn-off men (most at least) and offer lot more features that appeal to women. You should also highlight these features (and only these features) so the customer making the choice either sees full-value or no value from this option for the price they pay.

For good measure, to address the reference price issue, you should also add a really bad free version as well.

There you have it. Good and Effective Price Discrimination for toilets.

Whether or not that is the business you should be in and make the necessary investments to go through with branding, product design, messaging etc., is up to your economics.

Amazon Price Discrimination Done Well

I wrote a while back about price discrimination and its bad rep. It is actually not all bad. My attempt to rebrand it as price harmonization did not catch on. The right kind of price discrimination is offering multiple versions at different price points so customers will self-select themselves to the version they want to pay.

Like you pick retina display with MacBook Pro or SSD disk over HDD. This is second degree price discrimination. With price discrimination, as long as you do not restrict customers from choosing certain versions and let them choose any of your versions then it is perfectly acceptable.

The success of second degree discrimination also depends on packaging and pricing the cheapest version such that it helps bring-in low-end of the market without being attractive to those who would gladly pick the higher priced version had there not been the cheaper version.

Amazon has a product that very nicely executes second degree price discrimination, while also capturing a little bit extra consumer surplus from one of the genders. (Yes, pure gender based price discrimination is bad but I will show you why in this case it is not the case.)

Take a look at the 3 versions of the same model of GPS watch.

The first version

base-gpsThe base model without heart rate monitor costs you $147.35 (at a discount of $52.64). If you want heart rate monitor to go with the black model, it is sold separately for $45, bringing the total to $192.35.

Now the second version

red-gpsIt is the red model with included heart rate monitor, priced at $184.91. That is $7 cheaper than black base model plus heart rate monitor add-on.

Why is the drab base model priced such that its combo price is more than buying bundled red model? Because they are targeting the base model  at low-end customers with lower willingness to pay.  And if some of those insist on heart rate monitor with that color they likely value it more hence have higher willingness to pay and should pay $7 extra over the bundled red model.

Also note the list prices of the base and red models – $199.99 vs. $229.99 – a difference of $30. But how they are discounted is much different from the $30 difference. You would expect discounted price of red model to be just $30 over black base model. Instead it is $37.56 over base model. In other words the amount Amazon has to discount to make the sale goes down as they move up the model.

That is $7.56 in profit from effective pricing.

Finally, the pink one

pink-gpsThe pink model, arguably a choice targeted only at women, is $1.22 more than the red model. But still cheaper than black combo.   Nothing prevents men from buying it so the pink model pricing is not at all a gender based price discrimination. But helps to capture additional consumer surplus from women who most likely will buy it. (I am succumbing to stereotype here! Sorry!)

So is $1.22 a big deal? For the razor thin per-product margin Amazon operates at and the volume it does, it most likely does. The $1.22 flows directly to their net-income.

Overall a very fine management of pricing.

But don’t attempt this at your business – most businesses, especially small businesses and startups do not have the volume, data and computational wherewithal to fine tune pricing to this level. Worse, most are not even in the right zipcode to attempt any such fine tuning.

Ask me what your business should do instead!