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This is actually a argument based on the economic theory of pricing. To be quite fair, the statement that 3part is best is not entirely correct. The idea is he
by zwaps 9y ago
This is actually a argument based on the economic theory of pricing. To be quite fair, the statement that 3part is best is not entirely correct.
The idea is he following: In a old-school normal market, where you sell one good to a whole bunch of guys each etc, and everyone wants just one good, you may just post one price. You will not do better, no matter what you know or do not know.
But in most cases, posting a single price will not be optimal for you. This is because you sell multiple units to multiple customers, each possibly very different. And, you do not know what they would be willing to give you. You have asymmetric information.
If you KNEW everything, you could tailor a contract for each customer. But you don't.
In economics, we can tackle this problem using Mechanism Design.
Using game theory and nonlinear pricing (the non-linear is important here), you may be able to set a menu of possible contracts in a way that the customer self-identifies by choosing the best option for him.
The intuition of the problem is the following: Choose a menu of contracts that allows you, the company, to maximize profit, while also making the customer choose truthfully and thereby "tell you" what he is willing to pay.
This is what the three part price may do for you.
Now why is this not entirely correct? There is a (rather theoretical question) as to basically how far a two-part or three-part price is "nonlinear enough" for your set of customers. This is called implementation theory.
An excellent book to get behind this mystery is Tilman Borgers book on mechanism design
http://www-personal.umich.edu/~tborgers/ http://www-personal.umich.edu/~tborgers/
This was a free download for many years, so you can probably find the pdf.
- ttoinou 9y agoVery interesting but hard to come up with different packages for different types of clients (here 3 I guess ? not counting people who pirate your product) if you're not running a SaaS
- zwaps 9y agoIf every customer is anonymous and purchases one unit of your product, you can not really do any of this. If you can identify features of the customers, you may be able to price discriminate on that. Customer usually really, really hate this. If your product can be differentiated, you can use non-linear pricing. Bundles and other things are known. x-part prices more generally work like this. I have mentioned in another reply many examples showing that companies usually try very hard to implement non-linear pricing and most people don't really notice...
- paulsutter 9y agoOk, but for most things you really don't want a three part tariff: rides on uber (SaaS!), gasoline, houses, employee salaries, health insurance, hotel rooms, container shipping. The customer would just be annoyed and go deal with someone else. So what is the magic slice of products for which 3part is a good idea? All enterprise software? Some enterprise software? Only enterprise software? The most impressive pricing I've seen is Salesforce.com. The pricing is simple but genius. Per seat pricing, where the cost per seat goes up with functionality. I was boiled like a frog: the cost went from $300 per year to $300K per year, and there was nothing I could do about it. How would a 3-part tariff help them?
- tschwimmer 9y agoAre those real Salesforce pricing numbers? That's frightening. How much did your company grow during the same period?
- zwaps 9y agoIf you can not differentiate your product at all, it will be pretty hard to price non-linearly. You are right there: Customers will run away. It has happened on the internet (targeting), but people get very angry. Uber extracts from two sides of the platform, which is a more complicated matter. For the other examples, you are not exactly correct. Health insurance is clearly a two-part price, indeed it is a classical example. You pick your tariff and coverage. Whenever you pick, it's a nonlinear pricing scheme. Salaries are another thing. A base and a bonus are very, very common. That's two part. Also comissions and somesuch. Hotel rooms? Rate and extras? Minibar? Cars? Extras and bundling... All of that is non-linear pricing. So your point is basically correct. If the customer notices you get to extract all surplus, he might get annoyed. But a two part tariff most often seems beneficial to the consumer, because he gets to choose!
- paulsutter 9y agoUber’s complexity and lack of transparency around paying drivers is a really bad idea for the company, and only an MBA could think it’s good. Someday Uber will discover that they were just a missing feature in Google Maps, and this is why all the drivers will switch. Your examples have convinced me that a 3 part tariff is generally bad and an indication of extractive desperation on the part of the vendor, and fundamentally based on deception. If you wonder why people hate their banks, pricing is the reason.