Answer to Pricing Puzzle: Pricing at Hindu Temple

I have written in detail about this pricing puzzle before.

The question of right and wrong here is not about ethics but about profit maximization that does not leave money on the table in the form of unrecognized consumer surplus.

It is not possible to set different prices based on the make and model of the car. For one thing it creates operational issues and the other it will create customer backlash. You do not want to create the class divide here by saying “1%” pay more than “99%”. A better way is to offer choices  at different price points (second degree price discrimination) and let the customers self select.

In fact, if there is only one choice at flat fee, regardless of value of car, the Lexus owners may feel they are not getting the level of service they want.

It is highly likely those who want their Lexus blessed would happily pick a higher priced version. And if the Corolla owners want to pick the premium version they are doing so of their own volition.

Price discrimination, specifically second degree price discrimination, is not unethical even at the altar of Gods.

On the other hand, the temple could look at the data on the mix of cars that are coming in for blessing. If higher proportion of them are in the Luxury category (bubble days in the valley, you know), they can simply increase the price for all. For the few that want their Ford Focus or Corollas blessed, the higher price may pose a deterrent but any lost revenue more than compensated by higher revenue from increased price.

Toilet Paper Price Discrimination

I saw a curious case of toilet paper price discrimination at Target. No I am not talking single ply vs. two ply.  Here it is and tell me what you see and why.

Same Charmin product – same quality and total quantity (501 sq ft). Yet the 12 pack bundle of mega ultra roll is priced $14.29 and the 24 pack bundle of ultra roll bundle is priced at $13.69.

Only reasonable explanation is those who prefer the convenience of smaller bundle (12 vs. 24) and not having to change the roll too often have higher willingness to pay.

It still seems far fetched that Charmin has done such a fine job of segmenting based on these factors.

So let us resort to unreasonable  explanations

  1. Charmin is betting on people not noticing the price difference – after all who has the time to take pictures of price tags and write blog articles about them?
  2. Either Charmin or Target  messed up pricing
  3. This not so unreasonable one is they are trying to get rid of excess inventory of 24 pack bundles.

What is your take?

Price as the first choice attribute or last – Pricing Page Recommendation

Take a quick look at pricing pages of most web services and products. Most offer 3 or 4 versions that differ in features, usage (number of users, responses etc) and of course price. In every pricing page I visited (sampling, not comprehensive) the first attribute is always price. Some of the pricing pages use font and other highlighting to make pricing prominent.

What if price isn’t the first attribute you present to your customers?

What if your pricing page pitches the benefits of each version before it talks about price?

What if price is the last attribute for each version listed in your pricing page?

Last week I wrote about the difference between the Price leader and Price-Less leader*. The core idea was to start the conversation with your customers about all other attributes but price. When price is not prominent, you get to talk to customers about factors that are relevant to them.

A version of the concept of Price-Less leader was published in Journal of Marketing Research Dec 2009. The  article used the term “Benefits leader” instead of  “Price-Less leader” and they made a very relevant finding,

“When customers choose benefits leader (purely based on benefits and without price information) they tend to stick with that choice even when the price information is revealed. Even when faced with a higher price, they tend to stick with their choice based on benefits”

Applying these findings to pricing page, I hypothesize, when price is listed as the last attribute:

  1. More customers will pick your higher priced versions
  2. More customers will signup for your basic version (higher conversion)

This hypothesis is based on previous research on pricing but from a different context. So it is worth testing for your pricing page before you roll out. This is definitely worth adding to the A/B testing that you probably are already doing for the rest of the pages. I recommend this A/B testing despite my earlier warnings about A/B testing.

Note that I am not recommending that you do not show the price at all or show it only after customers sign up – I am recommending that you move the price to be last attribute you list under each version.

I am every interested in hearing your results. Send me a note on your results, even if you did not find statistically significant difference.

For the analytically inclined: If you do not want to do the traditional A/B testing you can use Bayesian. But I do not recommend a full blown Bayesian verification in this case.

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).

Segmentation Based On Purchase Occasion

It is relatively easier to target segments that are static with time – by that I mean, customers will stay in their “assigned segment” if not for their lifetime but for a much longer period. The extreme example is gender as segmentation variable.  A marketer can target the resources accordingly and can measure its effectiveness. But how can a marketer target  customers when at any given time the customer could be in any one of the segments?

I think the Danish word for this is  -Vaelg!  The English word is Versions.

Here is what Scandinavian Airlines does to target its customers,

Sometimes you want comfort, sometimes you want lowest prices and sometimes both. Fly our Business, Economy or Economy Extra – whatever fits your needs best. By the way Vaelg means choose in English

Please Self-select yourself!
Please Self-select yourself!

One last point – notice how they do not show any price in these options. This is applying consumer behavior principle of getting customers to commit emotionally before they see the price. This is a pricing tactic that works well with the chosen pricing strategy.

All in all a very good execution by SAS.