Charging Men and Women Different Prices

A supermarket in Germany is now selling separate men’s and women’s sausages. It is the same meat but the packaging and pricing are different.

The version targeting women is half the size of the version targeting men. And for good measure it is priced more  than men’s version. To see the price difference you need to look very closely at how they listed unit price for the two making the comparison difficult.

For women’s version they list unit price for 100 grams. For men’s version they list unit price for 1 kilogram. This requires customers to stop in their tracks and do the additional comparison math even though it is a very simple conversion.

Note: If you do the math you will see this could be just a case of non-linear pricing (volume discount), more on that near the end of the article.

One another difference in packaging is labeling –

The male sausage features an alluringly-clad woman – in front of a flaming background – while lady shoppers are being drawn to part with their hard-earned cash by a topless gentleman with excellent muscle tone in front of a serene, cloudy background. (Source and Picture Source)

So is this good or bad price discrimination? Gender based price discrimination is just plain wrong. I have written about Good and Bad price discriminations before.

Journalist  Susanne Enz sees this as “dull sexism.”

The sausages’ marketing, she said, implied that “men eat a lot and heartily, while women mainly want to be thin… Women are there to please, while men are allowed to enjoy.”

There is lot of truth to what Enz says here but there is also lots of bad marketing while not necessarily bad price discrimination here. For price discrimination to be labeled good  and effective it has to meet the following two criteria

1. To be labeled good: Customers must have choice and control to buy whichever version they please and not limited by who they are but only by their willingness to pay and wherewithal to pay. (See Amazon pink watches)
2. To be labeled effective: Price fences between versions must be defined such that those who can and willing to pay for higher priced version will not adversely self-select themselves to the lower paid version. Like 13″ 256GB MacBook Air vs. 11″ 128GB MacBook Air.
   Sometimes the fences end up done badly that they also punish those who can only afford the lower price version – like roof-less third-class train cars in olden days. (See tyranny of versioning)

Let us evaluate the German sausage  pricing on these two criteria.

Good Price Discrimination

Do the customers have choice? Yes. Both women and men can choose any of the two versions. So it is a case of second degree price discrimination (which is the best form of price discrimination despite its ominous name) and better than third degree price discrimination.  Third degree price discrimination is when the super-market checkout clerk charges one price for women and another for men at the time of checkout.

This is not that different from the  shaving gel case study I wrote a while back. Since nothing prevents  women from choosing the cheaper version targeting men, this is good price discrimination.

There is also merit to Enz’s statement that it implies, “men want to eat more”, but I would not take that claim any farther.

Not So Effective Price Discrimination

What are the price fences here ? Price fences are the features and triggers that make sure the higher willingness to pay  segment stays with its positioned version and not tempted to choose the version targeted for lower willingness to pays segment.  The fences here appear to be the amount of meat and the  picture on the label.

There is merit to the supermarket’s thinking that smaller sized version will be more attractive to women and hence setting a higher price.  But their price fences are awful – using pictures of “alluringly clad women” on men’s version and “topless gentlemen” on women’s version. Both are insulting to respective genders.

One variation that would have made improved this bad situation is – using “alluringly clad women” on men’s version and use a sane and sombre labeling that appeals to women’s intellect on women’s version. This would be the equivalent of roof-less third-class cars and shaving-gel. The hypothesis here is, women will be disgusted by the picture on the other version and will naturally gravitate towards their version with better picture.

So this gets mixed grade on effectiveness criteria.

Finally is this a case of price discrimination or simply a case of non-linear pricing unnecessarily confused with irrelevant packaging aspects?

If I do the math based on unit prices I see on the picture, the respective unit prices are

250 gram version has a unit price of €0.80 per 100 grams

500 gram version has a unit price of €5.98 per  kilogram, or €0.598 per 100 grams

Non-linear pricing is where you give better unit price to customers when they buy more units. Like Costco giving you better unit price on the 50 gallon mustard bottle. It appears that the price difference here fits that mold. Why the marketer chose to erect price fences and extract additional rent from women customers is beyond me.

What do you think? Is this good and effective price discrimination?

Let me leave you with a thought experiment. You likely know most public toilets in Europe charge you for usage. What if they charged different prices for men and women?
Will that be good price discrimination?
How will you make that both good and effective?

Starbucks Price Increase Déjà vu

When it works why mess with it? Be it a product, price increases, or messaging?

I am talking about recent Starbucks price increase. You hardly even noticed that the prices went up – now or the past two times they did it.

Here is what they did four years ago – 8% increase in prices,  two years ago – 10% increase in prices and now –10% increase in prices.

The product mix they chose and the level of price increase, the markets they chose and how they are messaging it are all exactly same as their last time.

There are always other reasons for setting prices or raising prices and it is not about customer selection or pricing at what you can bear to pay.

Effective pricing is not just about understanding customers and demand curves but understanding how best to communicate that pricing to customers. And as an outsider, do not confuse this cost-driven price messaging with how exactly Starbucks sets prices. No company setting prices based on value will explicitly come out and admit that they their prices have no connection whatsoever to costs.

Recently Paul Krugman wrote about this disconnect between costs and prices in The New York Times,

To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

And as Krugman agreed in his piece, it is perfectly acceptable to have this disconnect (although he had some riders attached).

Let  us look at Starbucks case  of setting prices. Here is a point by point comparison of the last two times. It is déjà vu.

Product Mix Impacted and Level of Price Increase

Then:

the price for 12-ounce “tall” brewed coffees and latte drinks went up 10 cents.

Now:

” the price of a Tall brewed coffee is changing, the biggest rise would be 10 cents, Mr. Olson said, adding that he can’t share specific price increases of specific drinks in different markets for competitive reasons”

The reason they are going after the Tall size is highly likely it is their most popular SKU with little or no demand elasticity.  Increasing price on the lowest priced item will also help make the Grande and Venti attractive due to relative pricing.

Markets where Prices are Going Up

Then:

“Starbucks Corp (SBUX.O) raised prices by an average of about 1 percent in the U.S. Northeast and Sunbelt on Tuesday, making coffee-drinkers spend more in New York, Boston, Washington, Atlanta, Dallas, Albuquerque and other cities.”

Now:

“Starbucks Corp. SBUX -0.81% plans next week to raise prices by an average of 1% on some of its beverages in the U.S. It would mark the first price change in 18 to 24 months for some markets, the company said.”

Once again they are targeting specific markets and not increasing prices across all markets. You can’t make up such identical news items. It is the likely same markets (those that have customers with higher disposable income and fewer competition). It is the same “1% average increase” message.  The 1% average is true but average is meaningless. It is done here to make  specific price increases look smaller.

Messaging

Then:

The Seattle-based chain said its pricing decisions are based on multiple factors, not just the price of coffee, which has eased lately.

Those considerations include “competitive dynamics” in individual markets as well as costs related to distribution, store operations and commodities, including fuel and ingredients for food and beverages, Olson said.

Now:

 Increasing rent, labor and non-coffee commodity costs as well as competitive dynamics are the reasons behind the new pricing, Starbucks spokesman Jim Olson said.

It is same spokesperson too. I had to pause and check I was not reading old news article. The stories are that close. I wonder if Mr. Olson even talked to press this time or the PR team simply used his quote from last time.

When it works why not repeat it? Like the movie sequels I guess.

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

The 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

It 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

The 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!

 

 

 

Pricing Flash Storage in Tablets – Don’t Call This As Markup

The New York Times Bits blog laments about the giant markup Apple and Amazon charge on flash storage. Bits blog not only complains about the price vs. cost difference but also caught on to the price difference between Kindle and iPad for the same storage.

Kindle: 16 gigabytes for $300 and 32GB for $370; to enjoy 16 extra gigabytes of storage, a customer pays $70 more. For its smaller 7-inch tablets, Amazon charges $50 more for an extra 16 gigabytes.

iPad: You can get a 16GB model for $500, a 32GB model for $600 or a 64GB one for $700. That’s $100 extra for that first 16GB bump, then a relatively cheap $100 to get from there to 64GB.

At the outset let me point out I have lamented on the same topic as well but mostly admired it and only lamented it a bit as a consumer. Let me point out how the flash storage prices vary even within Apple’s different product lines,

Yes both Kindle and iPad are able to extract lot more consumer surplus with their flash pricing. That is because they figured out their customers value the additional capacity lot more and are willing to pay the additional $100 (or $70) for doubling capacity. This is not markup and the fact that flash costs 50 cents per gigabyte should not matter.

Using words like markup comes from cost based pricing (add up all the costs then mark it up to get the price, hence markup), as is shown by this text in the same Bits blog post,

Of course, when you buy a new gadget, you’re not just paying for a slab of components. The maker of the product is trying to get you to cover the cost of research and development, manufacturing and advertising, and still rake in some profit.

Note how sure the author is – “Of course, you understand the price you pay is …”.

Let me do my own convincing and point out that – of course  customers are not concerned about your costs. They are not paying the price to defray your costs. Besides R&D, Manufacturing and Advertising costs are sunk and are not attributed on a per unit basis.

Customers pay for what they value and marketers charge for that value. If marketers figured out a way to deliver the value at  the lowest possible price it does not mean they have to pass on the savings as lower prices unless they are forced (by market forces) to do so.

Call this effective pricing and don’t call it as markup.

As a customer do I lament alongside Bits blog? I do. But as a product guy I admire their pricing.

For extra credit see my articles on

1. Nexus 7 flash pricing
2. Second degree price discrimination infographic
3. Why Apple does not include earphones with iPad?

Waging the right price war – The $65,000 Mistake

I believe “price war” may be a misnomer if both sides do not live to fight many rounds. We only see price battles or skirmishes that go for 1-2 rounds before one side throws in the towel or runs out of cash. There are two kinds of companies when it comes to price wars.

Category 1: There are just handful of companies that can wage incessant price war  by consistently keeping their prices low

Category 2: Even fewer that can withstand such low price attacks by their competitors.

Amazon.com and Walmart fall into the first category. Apple is in the second category.

In fact if the two players know that the other has the will, reserve and wherewithal to keep up the fight without ever letting up they most likely will choose not to enter price war in the first place. This is very much like nuclear deterrent  — mutually assured destruction.

BestBuy does not fall in either of the categories but was tempted to take on Wal-Mart with its iPhone 5 pricing. The result? BestBuy lost $65,000 in a single day.

Let alone the price war dynamics this is simply the wrong fight to pick. A tactical blunder.

First the product is not yours and the customer has many alternatives. Most are willing to pay full price at Apple stores. Customers do not think where they buy is important when it comes to iPhone (a qualifier is some insist they buy only after standing in line in front of Apple stores).

Second Walmart did not cut the price uniformly across all stores and did not make available unlimited quantities. Agreeing to match the price on such promotional tactic is simply wrong. It appears smart deal-seekers, instead of running from one Walmart store to another, simply walked into to neighborhood BestBuy and asked for the low price match. How convenient.

Finally, the low price was not attached to any other product sales and not designed as a loss leader that would help maximize customer margin.

And the result? Deal-seekers walked in, probably for the first time in many months, bought the $127 iPhone 5 and walked out without buying anything else. That is the $65,000 loss in a day.

Other readings:

See here for Waging Effective Price Wars.

See here for Effective Pricing

 

 

From Effective Pricing to Egregious Pricing – Starbucks

In the past I have only written praiseworthy things about Starbucks pricing. I always admired how they set prices for their drinks, decide to raise prices when everyone else was running price promotions and how they communicated their price increases. This time I think they have crossed over from effective pricing to egregious pricing.

First time I wrote about Starbucks pricing it was on their decision to increase prices when the global economy was going into recession

In the case of Starbucks, how did they arrive at price increase, going against the flow? The simplest calculation here is, when price conscious customers moved out all they are left with are price insensitive customers who prefer their products. Hence it makes sense to charge more for them as long as the loss in profit from further drop in customers is less than the increase in profit from higher price. (Here is an attempt at formal proof on why increasing prices yields better profits).

Later on it was on their price communication,

As you read this multiple times you will find all kinds of reasons except, “We cater to a somewhat higher-income customer and we price our products based on customer willingness to pay. Besides we don’t expect any push back from these high income segment”.

A key attribute of those practicing value based pricing is never explicitly saying that they are practicing value based pricing. There are always other reasons and you never say pricing at customer willingness to pay. A key part of practicing effective pricing is effective pricing communication and managing customer perception.

Even when they announced $7 lattes I only had good things to say. After all they likely have more data on their customers and buying behaviors than any of us do. They likely found a segment willing to pay $7 for lattes and are simply targeting them with a product version at a price those customers are willing to pay (second degree price discrimination).

Even if there is no such segment, a $7 price tag helps to improve the reference price in the minds of rest of their customers and hence will provide Starbucks with a way to increase prices of their other drinks.

All these are effective pricing. No doubt. But now I think they crossed over from effective to egregious, launching a contemptuous attack on their customer’s intelligence.

Starbucks recently introduced its new Steel gift card that is sold only through Gilt.com and costs you $450 but buys you only $400 worth lattes.

If we leave out the last phrase “$400 worth”, everything else about this product is indeed effective.

1. They chose the right customer segment and set a price specific to that segment
2. Set a hard limit on number of units they wanted to sell – a result of their understanding of the size of the segment and a tactic to create artificial scarcity
3. Designed the product to be distinctive (Steel over Plastic) – making it a conspicuous consumption. Imagine flashing this card in your local Starbucks, the baristas and the rest of us mere mortals have no option but submit to your opulence (Disclosure: I go to Starbucks only when someone else is buying)
4. Selling it only through luxury goods website Gilt.com and not at every Starbucks outlet – thereby not only reaching customers with high reference price, high willingness to pay and high wherewithal to pay but also not targeting rest of their customers
5. Guaranteeing profit from a high value gift card that locks up future sales and the possibility to add 10-15% of face value as profit from breakage (customers not using full value of the card)

Had they stopped right there, a $450 card worth $450 lattes, that would’ve been effective pricing. Then they took it one step further.  They decided to extract even more profit by setting the value of the gift card to only $450. And as they were wont to do with giving cost reasons they said,

One reason the card is so pricy is because it isn’t made of plastic — but specially etched steel. That guarantees the heavy metal wedge with the familiar Starbucks logo will stand out in your wallet and at the cash register.

The Starbucks card costs $50 to make,

Even if it is true, why should the cost matter in this case? This is not a true product. This is like the US Treasury asking you to pay $550 in change for a $500 bill because it costs them $50 to print that bill.  While it made perfect sense to use cost argument to push through price increases, cost has no relevance to take away value of the gift card.

What they have demonstrated here is utter disregard for the customer. They probably think, if these customers were willing to pay $5000 for a luxury product that costs $50 make why not take $450 cash from them for $400 worth lattes.

The sad part is they may be right and they likely will sell out all 5000 of their limited edition steel gift card. After all don’t we all pay $100 more for 16GB additional flash that only costs pennies? May be the steel gift card is laser etched and designed to fit so perfectly in your palm and that alone is worth $50 for some.

My outrage is probably misplaced and egregious pricing is likely the new effective pricing.

How are you going to react when you see that startup founder flashing the steel card at Starbucks, especially when his product is free?