5 ms·

Ok, 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, co

Ok, 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 ago
Are those real Salesforce pricing numbers? That's frightening. How much did your company grow during the same period?
zwaps 9y ago
If 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 ago
  Uber’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.
  - zwaps 9y ago
    The pricing scheme is derived as an optimality solution for the company. Obviously, it always (mathematically speaking, weakly) benefits the firm. An all-knowing monopolist will extract 100-epsilon% consumer surplus. That's why economists are big about regulation and taxation. Is it deception? Not necessarily. A pricing scheme is a menu of deals from which you pick the most beneficial for you. You then optimize as well - just that the company gets to set up the menu. If a company were to decide to leave a minimum surplus to you, the optimization problem would be almost identical. We just assume that companies set this minimum value small. Perhaps, however, this may not be the best long term strategy? Not all companies may try to extract everything. But what is a good and fair amount?
    - paulsutter 9y ago
      Business is about more than extracting the most you can. Most Wells Fargo customers are unhappy, but they stay because the competitors are just as bad. Unhappy customers is bad for business. Startups are often about giving customers a better experience than the incumbents. Toms writing is targeted to entrepreneurs who need to consider all aspects of the business, unlike product managers at Faceless BigCo, who “win” solely by the shitty little optimizations that you so love.
      - zwaps 9y ago
        Ignoring your needlessly hostile tone, it is Tom who proposes nonlinear pricing schemes. If there were no interest in controlling the surplus left for consumers, neither him nor anyone else would have need to employ such schemes. Entrepreneurs probably employ such pricing methods more often than BigCo as well, simply because they sell less uniform products to less anonymous customers. Your point?
        paulsutter 9y ago
        Yes my point is that the term "optimal" could be misleading. People reading the document are likely to interpret "optimal" to mean that it's the best business decision. But in many cases it's not the best decision. So my question (not point) is, when/for what is a 3 part tariff the best choice, when you consider all the other issues (like, what would annoy customers, etc). In the case of Salesforce, the day I signed up, if there were a significant base cost over-and-above the per-seat price, there's a good chance I would have avoided Salesforce, and Salesforce would never have gotten that (eventual) $300K a year from me. So it seems that their pricing is better than a 3 part tariff.
snowwindwaves 9y ago
one example of making customers show you how much they are willing to pay is with leather seats in cars. An f150 with leather seats costs 15k more than a model with cloth.
bprieto 9y ago
Most phone plans are 3 part tariffs, at least in Spain. You pay a fixed amount that includes some minutes of talk and some GB of data. If you go beyond the limits, you pay for each additional call or each additional 100MB block or whatever. I'd say most utilities work in a similar way, maybe with a 2part (fixed costs + metered consumption).

tschwimmer 9y ago

Are those real Salesforce pricing numbers? That's frightening. How much did your company grow during the same period?

zwaps 9y ago

If 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 ago
Uber’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.
- zwaps 9y ago
  The pricing scheme is derived as an optimality solution for the company. Obviously, it always (mathematically speaking, weakly) benefits the firm. An all-knowing monopolist will extract 100-epsilon% consumer surplus. That's why economists are big about regulation and taxation. Is it deception? Not necessarily. A pricing scheme is a menu of deals from which you pick the most beneficial for you. You then optimize as well - just that the company gets to set up the menu. If a company were to decide to leave a minimum surplus to you, the optimization problem would be almost identical. We just assume that companies set this minimum value small. Perhaps, however, this may not be the best long term strategy? Not all companies may try to extract everything. But what is a good and fair amount?
  - paulsutter 9y ago
    Business is about more than extracting the most you can. Most Wells Fargo customers are unhappy, but they stay because the competitors are just as bad. Unhappy customers is bad for business. Startups are often about giving customers a better experience than the incumbents. Toms writing is targeted to entrepreneurs who need to consider all aspects of the business, unlike product managers at Faceless BigCo, who “win” solely by the shitty little optimizations that you so love.
    - zwaps 9y ago
      Ignoring your needlessly hostile tone, it is Tom who proposes nonlinear pricing schemes. If there were no interest in controlling the surplus left for consumers, neither him nor anyone else would have need to employ such schemes. Entrepreneurs probably employ such pricing methods more often than BigCo as well, simply because they sell less uniform products to less anonymous customers. Your point?
      - paulsutter 9y ago
        Yes my point is that the term "optimal" could be misleading. People reading the document are likely to interpret "optimal" to mean that it's the best business decision. But in many cases it's not the best decision. So my question (not point) is, when/for what is a 3 part tariff the best choice, when you consider all the other issues (like, what would annoy customers, etc). In the case of Salesforce, the day I signed up, if there were a significant base cost over-and-above the per-seat price, there's a good chance I would have avoided Salesforce, and Salesforce would never have gotten that (eventual) $300K a year from me. So it seems that their pricing is better than a 3 part tariff.

snowwindwaves 9y ago

one example of making customers show you how much they are willing to pay is with leather seats in cars. An f150 with leather seats costs 15k more than a model with cloth.

bprieto 9y ago

Most phone plans are 3 part tariffs, at least in Spain. You pay a fixed amount that includes some minutes of talk and some GB of data. If you go beyond the limits, you pay for each additional call or each additional 100MB block or whatever. I'd say most utilities work in a similar way, maybe with a 2part (fixed costs + metered consumption).