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?

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!

 

 

 

You can’t let your past cannibalize your future – Note on iPhone 5 Sales

You most likely know by now that Apple is cutting back its demand for iPhone 5 components. Analysts who did the supply chain check attributed to the slowing iPhone 5 sales. And among the many reasons they quote the one that stands out (and probable) is

The less-expensive iPhone 4 and 4S is eating into iPhone 5 sales. With a two-year contract, the iPhone 4 is free and the iPhone 4S is $99, and they might be popular enough among consumers that not everyone is opting for the iPhone 5, which costs $199 with a two-year contract in the U.S.

The number to watch out for in Apple’s earnings report is the average selling price (ASP) of iPhone line. We have seen similar drops before when Apple decided to keep its $399 iPad 2 product. Now it appears it is iPhone’s turn.  (By the way, you can learn a lot from earnings reports.)

This is basic second degree price discrimination – when offered multiple versions at different price points, customers self-select themselves to the version that offers them the most consumer surplus. But to execute effectively on the multi-version strategy the business must raise appropriate version fences such that those who have higher wherewithal to pay and prefer the higher priced version are not tempted by the lower priced version and switch down.

In case of iPhone 4 and iPhone 4S, these are extremely very well done products that offer lot more value especially when combined with the lower prices they are being offered at. And these older (yet superb) models are cannibalizing iPhone 5 sales.

Most people say, “it is better your products cannibalize your own than others doing it to you”. While no cannibalization is good, that statement would make sense if newer higher profit generating models replace your older models before your competitor does that to you. You can’t however let your past cannibalize your future. It also says something about your future product pipeline.

I also don’t believe we have seen the end of iPhone downturn. Here is what I wrote in GigaOm about effect of iPad mini (before it was released)

iPhone: The crown jewel. It is harder for most to see how a smaller tablet could threaten the iPhone. Consider this in the context of total cost of ownership of an iPhone over two years: At $100 per month for mobile service fees and at $199 for the device, it costs $2,500. Mobile service providers are moving towards just one bundle of voice and data at $100 per month. If there were a $299 4G iPad Mini, some may consider a regular phone for occasional talking and the iPad Mini with $40 data fee as an iPhone replacement.

Is Apple, a company that is unusually excellent (here, here and here )in multi-version pricing strategy, starting to stumble?

Will Apple introduce $299 iPad?

There  are rumors in Tech Blogs that Apple might introduce a cheaper iPad – could be a 8GB version or a 7-inch version, priced close to $299. The argument goes, Apple does not want to yield the lower priced tablet market to Amazon. If Amazon took the risk to invest in 7-inch tablet and uncover a market for it, there is likely no risk for Apple to take its share of the market.

So should or will they do it? (Let us not consider here what Mr. Jobs said about 7 inch tablets)
If three to five million people bought 7-inch tablets in the last two quarters, isn’t that an opportunity for Apple? Not to mention, those who are on the sidelines, because they did not like Kindle Fire and could not afford $499 price tag may enter the market, expanding the pie.

All highly likely scenarios. But there is a third scenario of similar likelihood that most ignore when making a case for introducing a new lower priced version of the product. It is those who currently buy their $499 version switching to the $299 version.

Without going into the details of Second Degree Price discrimination here is a brief description. When there is no $299 version of iPad, if the $499 version offers you enough consumer surplus you will buy it. When there is a $299 version as well, you will pick that instead if it delivers more consumer surplus than the $499 version.

The question Apple will ask (but not the Tech Blog savants who are often wrong but never doubt their claims) is,

Is the foregone profit from those trading down made up by profit from new customers we acquired?

You can see their track record of past product versions (iMac versions  and MacBook Air versions)  we can say with high degree of certainty that Apple will ask this question.

If we used the previously published numbers by iSuppli and others on cost of iPad, it costs Apple about $249 to make $499 iPad. Say their gross margin remains the same for $299 iPad (i.e., cost drops to $149). Then for every customer trading down from $499 to $299 version, Apple has to bring in 1.67 new customers.

That is just to break-even the trading down customers. In addition they need to find millions more  to justify their investment.

Can they do it?

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Side Note 1: When you uncover a new market or spend your resources to develop a new market, it is not all yours. Others will swoop in and get their share.

Side Note 2: If you run a frozen yogurt chain and want to offer a lower priced plain yogurt version, this is the question you should ask – Am I losing profit from those trading down to plain yogurt because they get better consumer surplus at its price point?

Is Groupon a tool for price discrimination

NPR’s  Robert Smith claims Groupon’s success comes from simple economics, “Different people are willing to pay different prices for the same product”.

Since some people are not willing to pay $18 for burgers but are willing to pay $9, Groupon makes it possible to bring these customers and sell them the same burger for lower price.

Smith misses the point and even Groupon will strongly disagree with Smith’s claim. His argument is an extension from regular price promotion coupons which are a way to achieve price discrimination.

None of what Smith describes about price discrimination is incorrect it is simply irrelevant to the new world of Group Buying.

The basic question to ask is whether Groupon and the Groupies are Sales Channels or Marketing Channels.

Groupon positions itself as the marketing channel. Their messaging is about finding new customers who come in for 50% off, fall in love and become a regular paying full price. They do not want businesses to look at contribution margin at individual customer level.

Groupon does not want to be seen as a tool for off-loading excess inventory or just another way to reach sell to new customers. That is the job of a sales channel.

A sales channel  can be a tool for practicing price discrimination. You sell your product through different channels to different target segments and can charge different prices.

As a tool for achieving price discrimination,  Groupon will be effective only if

1. There are no opportunity costs to selling at lower price
2. There is no possibility of arbitrage – customers buy through one channel at low price and sell in different market at higher price
3. It is targeted and does not cannibalize current sales – full price customers continue to pay full price and do not take advantage of 50% Groupon promotion

The secret to success of Groupon is not price discrimination and is no secret at all. It is because we lack the appetite to do the math on long term value of giving away 75% of our revenue for short term long lines.

Why are the Raspberry and Strawberry Yogurts Priced the Same?

You are walking along the dairy aisle, picking up Yoplait yogurts. You prefer the 99% fat free version, so you load up on some strawberry, some raspberry and some vanilla. The price? All of them priced exactly the same,  59 cents. (Let us ignore the one time promotions they run on one flavor to clear out the stock). After picking a dozen or so 99% fat free version you look up and find Yoplait Whips and it also has almost the same line up of flavors. Price? 79 cents.

1. Why does the price vary across the types of Yogurt (let us call this vertical product line) but not across the flavors within a product line?
2. Does it cost the manufacturer the same to make raspberry and strawberry yogurt? Should the cost difference be reflected in pricing?
3. Do customers value the different flavors differently?
4. Why does the price vary across product lines?
5. Does a marketer stand to gain more profit by doing vertical line extension or by increasing variety within a product line?
6. Can the marketer increase market share by increasing variety within product lines?

In their paper published in Marketing Science( Spring 2006, Vol. 25 Issue 2, p164-174) Stanford GSB professor Michaela Draganska and Kelloggs’ Dipak Jain asked just these questions and found the answers for the rest of us marketers.

We find that consumers value line attributes more than flavor attributes. Given that consumers value line attributes more than flavor attributes,  firms have a lot to gain by pricing their product lines differently whereas they have little to lose from pricing all flavors within a line the same. We also find that the value of a product line is not merely a function of the number of  flavors it includes: The calculated inclusive values indicate that more flavors do not always result in increased utility for consumers and hence higher market shares.

Firms’ profits would not significantly increase if they were to price  flavors within a product line differently. Therefore, the current pricing policy of setting different prices for product lines but uniform prices for all flavors within a line appears to be on target.

What does this mean to marketers? This tells what true versioning means, it is not just changing colors or toppings. Do not chase market share by making minor tweaks, this does not result in  profit increase. Strategy is about making choices. When in doubt about where to invest your R&D and marketing dollars, instead of expanding variety within a product line (horizontal versioning)  go for product line extensions (vertical versioning).