For the past two days NPR has been running a story (and here) on people who are forced to live on Government transfers like food stamps. Finding nutritious food they can afford in $600 food stamps is a monumental task for the parents. A mother was talking about,
- How it is cheaper to buy sugary soda than milk
- How she can’t afford to buy lean meats or fresh vegetables
- How it is cheaper to get sugary cereals over healthier multi-grain options
I am not going to make this a commentary on who is responsible for their plight but would rather use this to illustrate the bad side-effect of versioning done wrong.
Versioning is a way of price discrimination. Since customers have different willingness to pay (in the above case different wherewithal to pay as well) and since it is not easy to find each customer’s WTP, versioning provides the best route for practicing price discrimination. Design multiple product versions at different price points and let the customers self-select themselves to the right version.
What the cereal brands and meat manufacturers are doing is practicing price discrimination through versioning. But,
- Why are unhealthy, sugary and fattier versions cheaper than nutritious options?
- Are these versions that much different in their costs?
- Are these marketers punishing the poor in the name of profit maximization?
- While extolling the virtues of versioning and price discrimination all along have I been overlooking this?
Versioning and the associated pricing should be designed so that those customers with higher Willingness to Pay (and Wherewithal to Pay) will self-select themselves to the higher priced versions and are not tempted by the cheaper versions.
The versioning fence is supposed to keep those who can afford to and want to pay more from moving over to lower priced side but it ends up punishing others. This is the equivalent of removing chairs and roofs from third-class train cars to keep the rich from choosing it over second or first class. While we can argue that the cheaper meats are fattier to prevent those who can afford higher prices from choosing them, we cannot overlook the unfortunate side-effect.
This type of versioning keeps these healthy foods out of reach of poor, leading to their obesity and other complications.
Like the French princess (and later queen) Marie-Antoinette who reportedly said (she did not, it was from the tabloids of that time according to The Lost King of France), the brands seem to be saying,
“If they can’t buy multi-grain cereal, let them eat Sugar bombs”
Therein lies the tyranny of versioning. If one price is good, two are better but how you do it may not always be right. A versioning strategy that is profitable is not enough.
There may be no ethics violation. But, taking away the roof of third class cars is not the best way to do versioning. There are better ways to version these products but the brands chose the easier path with undesirable consequences.
Versioning is ripe with opportunities for innovations, to build better fences and nudges that are not only profitable but also enable the brands to be socially responsible. After all, there is no dearth of irrational customers with high willingness to pay.