By Vaibhav Parekh
Edited by Madhavi Roy, Senior Editor, The Indian Economist
Wouldn’t it be simply amazing for companies if they could ask the above question to every customer? Unfortunately, they cannot, but they do employ a multitude of strategies to ensure that most people pay, what they can pay. This is price targeting- it effectively means selling an expensive product to a consumer who can afford to shell out more money and selling a cheaper product to the one who is frugal. Such a strategy eliminates the problem that arises when similar goods are sold at fixed prices. The fixed price may be too high for the frugal consumer, so he may not buy it and it may be lower than what a rich consumer may be willing to pay; again the company loses money.
So a company is always interested in knowing not only the purchasing power but also the willingness of a customer to pay for a product/service. Price targeting is essentially implemented in 3 ways- with individual consumer evaluation, with a group targeting strategy, or when a customer self-incriminates himself. While individual customer evaluation is tedious, e-commerce companies very effectively use this method by placing “cookies” in our browsers. When Amazon used this method, it went a bit too far: different people, based on their browsing patterns, saw different prices for the same book on the website. This anomaly was eventually discovered and Amazon has stopped using such methods since then.
Now, people tend to mind less when targeted in a group. This means that different groups of people are identified; those who would be willing to pay more and those not.
The entry fee in Taj Mahal in Agra for foreign tourists is ₹750, and for Indians is ₹20. The most apparent explanation is that foreigners can afford more, and thus it is fine to extract more money from them. Another explanation is that foreigners form a group of tourists who will probably visit the Taj Mahal only once in their lifetime, and so will pay whether the price for them is ₹750 or ₹100 or ₹20.
However, Indians and the locals from surrounding cities have a greater probability of visiting the monument again and may choose to skip the trip if the entry fee is too high.
At ₹20, most local tourists will be keen to visit the monument again. Here, it is not that the Indians cannot afford to pay ₹750, it’s just that they may not be willing to pay the entry fee again if the price is high.
The self-incrimination strategy proves to be the most effective for all companies and retail chains. To get people to give themselves away, companies offer products that actually slightly vary from each other but allow them to identify exactly how much the people are willing to pay for a particular drink or flavour.
Here, the cavalier ones give themselves away almost instantly.
Mc Donald’s has its own coffee bar, Mc Café, and it has a menu like most other major coffee chains- Starbucks or Costa Coffee. Now, a frappe with a few millilitres of caramel costs ₹20 more than a vanilla flavoured one. Now it is possible that sourcing caramel may be more expensive, may require a different type of vessel for storage and the company may be incurring a higher cost for the caramel. But at ₹20 more for a miniscule amount, Mc Café is most likely charging a very high mark up by using the flavour. And for caramel, if a fellow is a lost case like me, Mc Café will find many takers willing to spend more money to have that particular frappe.
Again, to illustrate this method, take the case of an airline. An airline can simply put all seats of the same size and at the same price. But this way it will lose out on business travellers who don’t mind paying more. Thus, airlines came up with the first class and the business class seats. Introducing the business class helps airlines accommodate rich travellers, and also decreases the amount of space left for the economy class. Now, the airline company also has the ‘power of scarcity’ for economy class seats to charge more. Here, since the objective of all travellers is same, i.e. travelling from place X to place Y, the company ensures that there is enough differentiation in service and convenience for business class travellers to entice people to buy a business class ticket. So there have to be complimentary pickups in Mercedes’, business class lounges at the airport have to be more luxurious, their seats have to be more spacious and they have to be given priority while entering and leaving the plane.
In short, the strategy is- mix it up! Add more flavours, add differently sized drinks, change the packaging of the product and there you go! The underlying idea here is that companies try to extract the maximum amount a consumer may be willing to pay. Price targeting gives alternate explanations to many seemingly obvious customer outreach strategies and pricing methods. These price-targeting methods are apparent in almost all kinds of industries and sometimes the companies go overboard while exploiting the purchasing power of the consumers.
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