{"id":1225,"date":"2012-11-22T17:37:04","date_gmt":"2012-11-22T12:07:04","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1225"},"modified":"2012-11-22T17:37:04","modified_gmt":"2012-11-22T12:07:04","slug":"games-companies-play-why-you-pay-more-while-he-pays-less-for-the-same-product","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/11\/22\/games-companies-play-why-you-pay-more-while-he-pays-less-for-the-same-product\/","title":{"rendered":"Games companies play: Why you pay more while he pays less for the same product"},"content":{"rendered":"

\"\"<\/a>
\nVivek Kaul<\/strong>
\nIndian Railways can even spring up positive surprises, now and then.
\nRecently while travelling from Delhi to Mumbai I was pleasantly surprised to have been upgraded from third AC to second AC. And this of course meant traveling more comfortably.
\nOn entering the coupe in the second AC bogie I found an elderly lady already sitting there who somehow figured out that I had been upgraded.
\n\u201cHow can they upgrade you? You haven\u2019t paid as much as I have!\u201d she said.
\nAnd she was right about it.\u00a0 I was travelling second AC while having paid for a third AC fare.
\nNevertheless, this sort of \u201cprice-discrimination\u201d has now become a quintessential part of our lives. Airlines are an obvious example. You could have paid many times more than the guy sitting next to you because you booked the ticket two hours before takeoff and he had it all planned out three months back.\u00a0\u00a0Yours might be a business trip wherein you need to be a particular place on a particular day at a particular point of time. The person sitting next to you might be simply travelling for pleasure and could have thus planned it all in advance.
\nWhen books are first launched they are typically launched in the hardback form. A few months later a cheaper paperback is launched. The hardback is targeted at an avid book reader who just can\u2019t wait to have his hands on the book, and so is ready to pay more.\u00a0\u00a0When the bestselling\u00a0Shantaram<\/i>\u00a0first came out in India it retailed for around Rs 1200 in hardback form. Prices finally fell to around Rs 400 for the paperback, which was 66% lower.
\nBut these as I said a little earlier are the obvious examples. Companies have also started using the discriminatory pricing strategy when it comes to electronic products. This has started to happen primarily because being spotted with the latest cell phone (be it an Apple iPhone 5 or a Samsung Galaxy G3) or a tablet (the Apple iPad) gives so much meaning to the lives of people these days. Till a decade back a man\u2019s worth was decided by what he wore. Now it\u2019s decided by the brand of cell-phone that he carries.
\nWhat was once a luxury became a comfort and is now almost a necessity for a large number of individuals. When such products are first launched they are targeted at the \u201cgeeks\u201d or early adopters who find a lot of meaning in their lives by being the first ones to use the latest i-Pad\/i-Phone and hence are willing to pay more for it.
\nCompanies tend to exploit this human need by charging more for freshly launched electronic products. Of course, once companies have skimmed higher prices off these early adopters, they cut prices so that you, I and everybody else, can start buying the product.
\nIn the apparel industry, fresh stocks go for higher rates towards the beginning of a season, whereas as the season ends the same set of clothes is sold at a discount.
\nThe logic behind price discrimination is to divide consumers into various categories and get them to pay what they are willing to pay. As Seth Godin points out in\u00a0All Marketers are Liars\u00a0<\/i>\u201cRalph Lauren generates a huge portion of its sales from seconds\u2026 There are so many of these stores that many of the items aren\u2019t seconds at all.\u201d
\nSo those who are price sensitive buy the \u201cso-called\u201d seconds, those who are not buy the \u201cso-called\u201d originals. Companies try and cash in on this price sensitivity of consumers through price discrimination.\u00a0Anyone living in Mumbai can go to Parel and buy all kinds of things from the so called seconds shops that swarm the area and get a good discount doing so.
\nAs Jagmohan Raju a professor at Wharton Business School says in an article published by\u00a0Knowledge@Wharton \u201cCompanies\u2026charge people different prices depending on the buyer’s desire or ability to pay\u2026They reap wide profit margins from those willing to pay a premium price. In addition, they benefit from high volume, even at a lower per unit price, by building a wider customer base for the product later.\u201d
\nBut this logic doesn\u2019t always work. Consumers may not mind discounts for senior citizens or lower prices for early morning cinema shows, but they can be touchy about discriminatory pricing.
\nIn the late 1990s Coca Cola developed a vending machine which charged the consumer a higher price on warm days. As Eduardo Porter writes in\u00a0The Price of Everything\u00a0<\/i>\u201cWhen Coke chief executive Doug Ivester revealed the project in an interview\u2026a storm of protest erupted.\u201d Coca Cola had to ultimately drop the idea.
\nIn September 2000, it was revealed that\u00a0
www.Amazon.com<\/a>\u00a0was charging different prices for the same DVDs to different customers. The company denied segregating customers on the basis of their ability to pay, something they could easily figure out from their shopping histories.
\nThe early adopters of Appne iPhone were an unhappy lot when in 2007, the company decided to cut prices of the 8GB model from $599 to $399 within two months of launching it. The company had to placate this lot of customers by offering them a $100 store credit.
\nHowever, there are no easy ways of ensuring that your customers do not feel cheated. One way is to differentiate the offering in some way. \u201cCompanies have to sell products that are at least slightly different from each other,\u201d writes Tim Harford in\u00a0The Undercover Economist<\/i>. \u201dSo they offer products in different quantities (a large cappuccino instead of a small one, or an offer of three for the price of two) or with different features (with whipped cream or white chocolate),\u201d he adds.\u00a0\u00a0The products are marginally different, but it gives the company a reliable excuse to charge \u201csignificantly\u201d higher prices. The next time you go to a coffee shop try this little experiment by just try saying no to everything extra that the barista tries to offer you and see by what proportion your bill comes down.
\nBook publishers tend to launch a book in a hardback form.\u00a0\u00a0The cost of production of a hardback is slightly higher, but the price difference between a hardback and a paperback is significantly different (as we saw in the case of\u00a0Shantaram\u00a0<\/i>earlier).\u00a0\u00a0The hardback is just a way of telling the early buyer that the book firm is offering him something more.
\nFrequent flyer programmes work in a similar way where the frequent flyer may get a cheaper rate because he is a frequent flyer and thus other flyers do not feel cheated.
\nCompanies practice price discrimination in the hope of raising their average price per unit of sale.\u00a0This of course works if the core business model of the industry is strong.\u00a0\u00a0But even price discrimination cannot rescue a flawed business model.
\nA great example is the newspaper\/magazine industry worldwide. It started putting news and analysis free online while expecting those buying the newspaper\/magazine in their physical form to pay a price for it. \u00a0Of course consumers will take what is free and shun what they have to pay for, especially if it\u2019s the same product. No wonder, worldwide the industry is in trouble. While it was easy to put news\/analysis free online and get the so called \u201ceyeballs\u201d, nobody bothered to figure out how would they go about earning money doing the same?
\nThe other example of an industry which has been disaster despite all the price discrimination is the airline industry. As Porter points out \u201cFor all their efforts at price management, competition has pushed airfares down by about half since 1978, to about 4.16 cents per passenger mile, before taxes\u2026In terms of operating profits, the industry as a whole spent half the decade from 2000 to 2009 in the red.\u201d
\nAt times companies end up in trouble because of price discrimination practiced by someone else. A spate of websites which sell books at a discount of as high as 40% have been launched in India over the last few years and this has led to bookstores getting into serious trouble. People now use bookstores to browse and check out what are the latest titles to have come out and then go home and order the books online at a discount.
\nPrice discrimination is a new game in town and impacts consumers and companies in both good and bad ways. Hence it\u2019s important, at least, for consumers to be aware when and where are they being price discriminated. \u00a0Or else, they are likely to react like the old lady who travelled with me from Delhi to Mumbai.
\nThe
article<\/a> originally appeared on www.firstpost.com<\/a> on November 22,2012.
\n(Vivek Kaul is a writer. He can be reached at
vivek.kaul@gmail.com<\/a>)<\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul Indian Railways can even spring up positive surprises, now and then. Recently while travelling from Delhi to Mumbai I was pleasantly surprised to have been upgraded from third AC to second AC. And this of course meant traveling more comfortably. On entering the coupe in the second AC bogie I found an elderly … <\/p>\n

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