Deliberate Pricing or Math Ignorance?

What do you think? Is this a case of

  1. Asymmetrically Dominated  Option (Decoy pricing) to make it attractive to buy the middle option?
  2. Effective non-linear pricing to capture more value from those who want 3 baskets (like what we saw with hair-braiding case here)
  3. Deliberate mis-pricing to capitalize on those customers not so good at math?
  4. Deliberate pricing (with the separation of price postings) to capture consumer surplus?
  5. Math error by vendors compounded by customers’ reluctance to do the math?

 

What is this price list telling us?

This is a screen shot of the price list for obtaining ISBN numbers. Which version do you believe is their most popular one?
Take a look at this and see if you agree with my readings of this

On the technical side, this is a case of non-linear pricing. That is the price per unit decreases as the volume of units purchased increases. The first ISBN costs $125 but  1000th ISBN costs only $1. The reasons are many fold, decreasing utility to customers, alternatives available when you are buying that many ISBNs, etc.

The more interesting aspect is the price points of  single ISBN vs. 10 ISBN. Why is a single ISBN priced at $125 but  ISBNs are priced only twice as much?
Which version do you think is more popular – the single ISBN or the 10 ISBN version?

As with any pricing scenario let us start with the customer segment than the product. These two prices tell us more about the customers they are targeting and the version they are nudging their customers to buy.

Who buys ISBN by going to a self-serve website? More specifically who buys just one ISBN?

The first time writers looking to self-publish their books. They come with an idea and unshakeable hope that this book is going to be a hit. No ISBN? No hardcover book!

The price $125 must have come from an analysis of these self-publishing authors and their willingness to pay and wherewithal to pay. After all there are alternatives like going with Kindle publishing that requires no ISBN number.

But why stop with $125 when you can get another $125 at no incremental cost? Take a look at what the website says below the price list

The customer has already made the decision to buy the first ISBN now if you sell them the hope that they could be producing more books in the future you are able to capture incremental value with little or no cost to you.

Surely every first timer has at least one more book left in them or at the very least they could be releasing soft cover version of the same. Hence the second version that offers 10 ISBNs for the same price it would cost to buy the second ISBN.

Given these two options it is highly likely that most customers buy the $250 bundle.

If one price is good, two are better!

So why aren’t  there versions that offer 20, 30, 200-900? 

Note: May be price list is not telling us any of these points and it is just that  am primed to see these readings from price lists.

Taxing Your High Volume Customers

When the pricing per unit is not uniform across all units and varies with quantity purchased, it is called non-linear pricing in economics. There are two main reasons a marketer will practice non-linear pricing:

  1. Customers have decreasing marginal utility with every additional unit and the price must change to reflect the reduced value. So if you are a maker of bottled water, you price your single bottle at one price and multi-pack at different price.
  2. Another reason is to reflect your decreased cost to serve the customer who buys high volume. Suppose you made and sold physical components, like the glass pane for LCD panels any customer buying high volume helps to defray  many different costs and  contribute to large proportion of your revenue and profits so you give a discount

Should you always decrease the price with volume? Non-linear does not mean prices will only decrease with quantities purchased, price per unit can increase as well.  There are three primary reasons for this:

  1. The value to customer increases non-linearly with the quantities they buy. For example, a $10 Mbps Internet connection enables new services that are of higher value than that is possible with a 7Mbps connection.
  2. The cost to serve the customer increases non-linearly after certain limit. For example, there is need for new investments or new costs that need to be passed along to the customer.
  3. Allowing the customer to consume high quantities comes at higher opportunity cost in the form of lost sales.

The third reason is exactly the case with cellphone providers. In a NYTimes article on Cellphone pricing plans, economists (surprisingly) described this as “weird”

“The whole pricing thing is weird,” said Barry Nalebuff, an economics professor at the Yale School of Management. “You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.

”To economists, it simply doesn’t make sense to make chatterboxes pay that penalty. After all, most businesses tend to give discounts to customers who buy more.

It is not weird if you look at how cellphone networks are provisioned. The way said cellphone pricing plans are structured is called three-part tariffs. At any given coverage area, served by one Radio Base Station, there is limited capacity. At any given time only so many users (voice or data) can be supported.  With all pre-paid subscribers a cellphone provider can size their system accordingly knowing how many total users they can support and based on call model how many simultaneous calls they can support.

Admitting a user to consume radio capacity beyond their allocated minutes will come at the expense of not providing service to other paid customers. Charging a higher unit price per minute will discourage those heavy users and nudges them to upgrade to next subscription level. When more such customers upgrade the cell phone provider can make additional investments in capacity.

There is nothing weird in not rewarding your high volume buyers. Cost reasons aside, if the value to the customer increases non-linearly your price should increase non-linearly as well, to capture a fair share of that value.