6 ms·

Ask HN: Price discrimination

15 points by yrashk 17y ago

Hi, Due to a project I am working on, I was thinking a lot about trading formalization and related issues, and it brought me back to a question that was bothering me for many years. There is a lot of companies selling products without a price tag — you simply can't know whether it is within your budget without talking to sales reps. My assumption is that this method is used to get as much as possible off big companies (simply because they have money) and may be sell it to smaller companies at a lower price. Given the product remains the same, it really kind of bothers me that the same product goes for different prices making some buyers having worse deal... just because they have money. Obviously, this is beneficial for sellers as it leads to potentially higher revenues. It usually gives me an impression that such sellers either don't know value of their product OR they are always trying to exaggerate it. I do realize that the same product might yield different values for different companies, but hey, this is definitely not only about how much money the buyer company has (I also realize that seller can actually analyze each buyer's needs and yielded value in order to find a right price). May be I am just to much into trading formalization concept and missing something... is there any other benefits of "no price tag" approach, particularly for buyers?

rythie 17y ago
It's called Price Discrimination: http://en.wikipedia.org/wiki/Price_discrimination http://en.wikipedia.org/wiki/Price_discrimination
- yrashk 17y ago
  thanks!
- tptacek 17y ago
  It's also called "market segmentation" and "product line management".
- mahmud 17y ago
  It's called Yield Optimization.
deleted 17y ago
[deleted]
weaksauce 17y ago
I think that the business goal of secret pricing to get a high pressure sales guy on the in contact with the potential buyer to close the deal.
- russell 17y ago
  I agree that that is the primary motivation. You will notice that these companies usually do not give enough technical information to do a preliminary evaluation. My experience has been that I have to sit through a presentation, before I get what I need. I dont like this song and dance, so they are hurting themselves with me.
- tptacek 17y ago
  No, the business goal of "secret pricing" is the same as the business goal of not being the first to name a number in a salary negotiation. The person who gives a number first concedes an advantage to their counterparty. Another practical advantage of not naming your price is that it ensures you get maximal contact with your market. If you publish a pricing matrix, some percentage of your market will (almost by definition) "price themselves out" of your product. You'll never even get to talk to most of these prospects. With "secret" pricing, you retain the ability to at least talk to them, to learn if it's feature/function you're lacking or if it's pricing, and to figure out what your pricing should be. Note that there are a lot of tricks that PMs can use to get "secret" list pricing from competitors; you could use the same tricks to uncover prices as a customer, but it's much easier just to get on the phone and ask.
  - moe 17y ago
    Another practical advantage of not naming your price is that it ensures you get maximal contact with your market. If you publish a pricing matrix, some percentage of your market will (almost by definition) "price themselves out" of your product. I call myth. In the general case when there is an offering A that costs a known figure $X and an offering B that costs a phonecall only to get a quote then I won't even bother making that call unless there is a serious headache with offering A. Not telling a price speaks "we are more expensive than the others". It also speaks "we will waste your time with phone conferences and powerpoint presentations" and "we wear ties and are very important, probably much more important than you". None of that gets my business if I can avoid it.
ErrantX 17y ago
There are combinations of reasons for this. Firstly to impede competitors a little (always worth doing). Secondly because it encourages people to ring your sales line and talk to a human - a sale is a LOT more likely then. Also it is likely the product is in the realms of enterprise or business class. Quotations might need to be customised etc. People looking for this level of product are probably less worried about the price point. And finally it is the kind of behaviour companies expect. They WANT to ring you up and be quoted.
- yrashk 17y ago
  well, depends on a company. I run a company but I LOVE getting straight and immediate answer on a question "how much does this cost?" rather than spending weeks in phone calls with sales guy asking me "how much can you afford?". I think asking this question is somewhat silly :(
  - tptacek 17y ago
    You can usually get pricing on a first call with an account manager just by saying "I'm interested, but I'm not going to talk to you again without back-of-the-envelope pricing".
- rythie 17y ago
  I can see that MS Windows on netbook and in China is effectively priced to impede competitors (Prirates and Linux respectfully). MS needs Windows to be popular to justify spending billions of dollars on it. Regarding the last 4 points, I think companies like you having to ask the price, because then they know who you are and can sell to you - vs. you anonymously going to a website and leaving.
bokonist 17y ago
is there any other benefits of "no price tag" approach, particularly for buyers? Yes. Say the marginal cost of a good is $1000. The fixed cost of developing the product was $900,000. There are 100 potential customers. In order to break even, the average sales price must be $10,000. But let's say that some customers can afford to pay $50,000, while most others can only pay $5,000. Without price discrimination, the product simply would not exist. If you charged $10,000 to everyone, the smaller companies simply could not buy. But if you price discriminate, and charge the small companies $5,000 and the big companies $50,000 you can cover your fixed costs and break even. Everyone wins. The producer makes money and both the small customers and big customers get a product that otherwise would not exist.
- yrashk 17y ago
  good point, so it is effectively "rich businesses subsidizing others" :)
  - TimothyFitz 17y ago
    It's also "poor businesses subsidizing rich businesses". Note that the rich business didn't have the ROI to go out and build the tool themselves; without poor businesses chipping in they wouldn't have the tool either.
    - gaius 17y ago
      It's free trade - everyone who participates ends up wealthier.
- babyboy808 17y ago
  I never thought about this. But what happens if the company that purchased the product at 50k finds out another company paid just 5k because of their size?
  - yrashk 17y ago
    Yeah, I am curious about this, too. Wouldn't it be better to formalize this approach? Lets say, base price is 50K but there is, say, a "Startup Edition" which is essentially the same but for companies that qualify as new startups. I've seen this approach used here and there. Sill price discrimination? Yes, sort of. Formalized? Yes.
rythie 17y ago
Even with list pricing, the price does not often represent the costs. For example from Apple: 32GB iPhone 3GS costs $100 more than the 16GB model, yet a 16GB microSDHC card only costs $50.
njl 17y ago
You seem to feel some sort of moral obligation to price things as cost-plus. "This good cost me $90, 10% profit is reasonable, you can have it for $100." You're upset by pricing based on value. "This good cost me $90, but it's going to save you $500 this year alone, so it is a steal at $250." I guess my argument to you is that the goal is (naturally) to squeeze more cash out of customers. But the customers with more money are presumably getting more value out of the product. For my current venture, we're selling software that helps keep students from dropping out of college. Our effects are measured in additional revenue to the school from students retained. Assuming we manage to provide the same percentage improvement to every school, the value we provide to an institution is going to vary widely. A small community college might have a third of the revenue per student as a private institution, and a small school might have a tenth as many students as a larger institution. My incremental costs aren't really all that much greater from school to school, but the value to the schools vary widely. It only makes sense to provide them different prices.
- tptacek 17y ago
  The first thing I learned in my first marketing job was never to use cost-based pricing. Nobody prices technology this way in the real world.
DanielBMarkham 17y ago
"sellers either don't know value of their product OR they are always trying to exaggerate it." You have a misunderstanding about value. Sellers CANNOT know the value of their product -- the value of their product is determined by each individual buyer given each individual buyer's circumstances. There is no "universal" value for a product. Products are traded for money all the time at various price points based on millions of criteria. It's this misconception that's causing your problem.
bmelton 17y ago
I see a lot of conjecture about how secret pricing is or isn't beneficial, but one thing that seems to be overlooked is the complexity of enterprise class pricing. If I call BEA (now Oracle) for a portal, the application stack is modular down to app functions, such that if I want publishing in my portal, there's a publisher module. Document repository is a seperate cost as well. I could buy 'just portal' if I really wanted, but without speaking to a BEA sales rep, in the absence of a LOT of prior experience, I simply can't know WHAT to buy. That said, I've always found the 'per-seat' pricing model to be a pretty effective form of price discrimination. $10 a seat means that the 100 employee company is only paying $1000, but the 30,000 employee company pays $300,000. It's fair(ish), and it's an effective way to scale support costs as well without having to pay per hour or incident.
- tptacek 17y ago
  The problem with per-X licensing is that customers hate it. People will pay more for a flat-priced product than they will for the equivalent licensed version, even if there's a site license available. That doesn't make per-X licensing wrong (lots of web 2.0 startups seem to be doing well with it), but it's something to consider. For instance, consider the fact that the person making the buying decision at a customer might have to deal with a honorous justification, purchasing department, and PO process every time their license needs change.
  - bmelton 17y ago
    Interesting. Most of my customers are government, so I guess that's where the difference lies -- they like having a number to point at and say "that's how much it costs". Whether or not it's the cheapest product, it's preferred to ambiguously priced applications. Of course, that's one of the main reasons they invented the GSA I guess.
brk 17y ago
My assumption is that this method is used to get as much as possible off big companies I think that your assumption is grossly inaccurate, and you should probably put some effort into basic sales and marketing concepts. I will tell you that 9 times out of 10, when you think a corporation is trying to exploit some nefarious tactic to rip off some or all of their clients, that the reality is simply that you don't understand the process or are missing some key data point. IE: corporations are not all dark and evil. It's important to understand this and grasp it. Presumably you (the generic you) would like your venture to become large and sustainable and "big" someday. Anyway, others in this thread have done a good job explaining some of the concepts of value-based selling and other reasons why for some products it is impractical to have a one size fits all pricing model. To answer your question, though, one of the benefits of no price tag is that if you were to publish a median price, you might scare off some of your small or large clients from calling up. They would either think the product is too expensive and complex, or too simple and limited for their needs, when in reality neither is true. By talking with a sales agent a price that is fair and accurate for that customer can be established.
dkokelley 17y ago
A hidden benefit to consumers might be seen with complicated systems. If you were told that a complicated system was $10,000 base price, you might be upset that the typical price for the complete system is $30,000. You were expecting to pay one amount, but after realizing what your needs are you have a totally different price. The selling company can't expect to know what you need until you meet with them, which is why you have to meet before seeing a price.
ovidiupl 17y ago
I finally registered on HN to make one short comment: Read "Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles". It's a short, readable book on pricing "for dummies" by Richard McKenzie (UC Irvine). I have zero formal training in economics, and I found the book enlightening. It discusses price discrimination thoroughly - after all, it's a critical component of pricing theory. I, too, find the thought of one buyer paying more simply because s/he can afford the price somehow "wrong". I don't fully buy the explanation in the book (mainly revolving around time opportunity costs, as I see it). But, at the same time, life is not always fair - morality and money are orthogonal to some extent. If this behavior were deemed harmful by society, surely it would be illegal by now? [Edit: Minor Engrish nit.]
- JimmyL 17y ago
  re: Popcorn - I haven't read the book, but I have helped run a movie theater. The answer, if you're not going to read it, it that popcorn (and the associated food products) is how the theaters make their money. Sure, your ticket price contributes, but it's mostly to cover their constant labor and facilities costs. If a movie theater schedules a showing, it has to run - doesn't matter if there's 2 or 200 people in the theater at the time. The labor to run the show is scheduled far in advance, and represents a sunk cost to the theater. That cost is seen by theater management as the cost of getting people into the building. Once they're there, however, they're pretty likely to buy some food, based on the advertising and how the theaters are designed - which is pure profit (the material cost for a large popcorn is about 2 cents). It has incredible margins, and lasts forever (none of the stuff they serve goes bad). It's similar to how TV works - their core business is selling advertising, and if the cost of business to do that is creating shows that people like, so be it. Put another way, the point of TV shows is to get you in front of your TV so that you'll watch some ads. Likewise, the point of movies is to get you in the building so you'll buy some food.
dejan 17y ago
Your question made me think about the topic thoroughly. I wrote a suggestion what to do, by letting the customer suggest the price. http://www.aleveo.com/ideas/voluntary-price-suggestions http://www.aleveo.com/ideas/voluntary-price-suggestions
whatusername 17y ago
There are other alternatives to no price tag.. Think Tight-Ass Tuesdays, discount coupons, etc.. Some people will buy your product whatever the cost - others will only at a lower price.. To maximise the value/sales - the price spread is a good idea...
rs 17y ago
A slight side step from the main discussion (do apologise for that), but does anyone know whether price discrimination is regulated/protected for consumers ? Just wondering if there's a legal side to it. i.e. is there a limit to how much a seller can price discriminate ? etc

15 points by yrashk 17y ago

rythie 17y ago

It's called Price Discrimination: http://en.wikipedia.org/wiki/Price_discrimination http://en.wikipedia.org/wiki/Price_discrimination

yrashk 17y ago
thanks!
tptacek 17y ago
It's also called "market segmentation" and "product line management".
mahmud 17y ago
It's called Yield Optimization.

deleted 17y ago

[deleted]

weaksauce 17y ago

I think that the business goal of secret pricing to get a high pressure sales guy on the in contact with the potential buyer to close the deal.

russell 17y ago
I agree that that is the primary motivation. You will notice that these companies usually do not give enough technical information to do a preliminary evaluation. My experience has been that I have to sit through a presentation, before I get what I need. I dont like this song and dance, so they are hurting themselves with me.
tptacek 17y ago
No, the business goal of "secret pricing" is the same as the business goal of not being the first to name a number in a salary negotiation. The person who gives a number first concedes an advantage to their counterparty. Another practical advantage of not naming your price is that it ensures you get maximal contact with your market. If you publish a pricing matrix, some percentage of your market will (almost by definition) "price themselves out" of your product. You'll never even get to talk to most of these prospects. With "secret" pricing, you retain the ability to at least talk to them, to learn if it's feature/function you're lacking or if it's pricing, and to figure out what your pricing should be. Note that there are a lot of tricks that PMs can use to get "secret" list pricing from competitors; you could use the same tricks to uncover prices as a customer, but it's much easier just to get on the phone and ask.
- moe 17y ago
  Another practical advantage of not naming your price is that it ensures you get maximal contact with your market. If you publish a pricing matrix, some percentage of your market will (almost by definition) "price themselves out" of your product. I call myth. In the general case when there is an offering A that costs a known figure $X and an offering B that costs a phonecall only to get a quote then I won't even bother making that call unless there is a serious headache with offering A. Not telling a price speaks "we are more expensive than the others". It also speaks "we will waste your time with phone conferences and powerpoint presentations" and "we wear ties and are very important, probably much more important than you". None of that gets my business if I can avoid it.

ErrantX 17y ago

There are combinations of reasons for this. Firstly to impede competitors a little (always worth doing). Secondly because it encourages people to ring your sales line and talk to a human - a sale is a LOT more likely then. Also it is likely the product is in the realms of enterprise or business class. Quotations might need to be customised etc. People looking for this level of product are probably less worried about the price point. And finally it is the kind of behaviour companies expect. They WANT to ring you up and be quoted.

yrashk 17y ago
well, depends on a company. I run a company but I LOVE getting straight and immediate answer on a question "how much does this cost?" rather than spending weeks in phone calls with sales guy asking me "how much can you afford?". I think asking this question is somewhat silly :(
- tptacek 17y ago
  You can usually get pricing on a first call with an account manager just by saying "I'm interested, but I'm not going to talk to you again without back-of-the-envelope pricing".
rythie 17y ago
I can see that MS Windows on netbook and in China is effectively priced to impede competitors (Prirates and Linux respectfully). MS needs Windows to be popular to justify spending billions of dollars on it. Regarding the last 4 points, I think companies like you having to ask the price, because then they know who you are and can sell to you - vs. you anonymously going to a website and leaving.

bokonist 17y ago

is there any other benefits of "no price tag" approach, particularly for buyers? Yes. Say the marginal cost of a good is $1000. The fixed cost of developing the product was $900,000. There are 100 potential customers. In order to break even, the average sales price must be $10,000. But let's say that some customers can afford to pay $50,000, while most others can only pay $5,000. Without price discrimination, the product simply would not exist. If you charged $10,000 to everyone, the smaller companies simply could not buy. But if you price discriminate, and charge the small companies $5,000 and the big companies $50,000 you can cover your fixed costs and break even. Everyone wins. The producer makes money and both the small customers and big customers get a product that otherwise would not exist.

yrashk 17y ago
good point, so it is effectively "rich businesses subsidizing others" :)
- TimothyFitz 17y ago
  It's also "poor businesses subsidizing rich businesses". Note that the rich business didn't have the ROI to go out and build the tool themselves; without poor businesses chipping in they wouldn't have the tool either.
  - gaius 17y ago
    It's free trade - everyone who participates ends up wealthier.
babyboy808 17y ago
I never thought about this. But what happens if the company that purchased the product at 50k finds out another company paid just 5k because of their size?
- yrashk 17y ago
  Yeah, I am curious about this, too. Wouldn't it be better to formalize this approach? Lets say, base price is 50K but there is, say, a "Startup Edition" which is essentially the same but for companies that qualify as new startups. I've seen this approach used here and there. Sill price discrimination? Yes, sort of. Formalized? Yes.

rythie 17y ago

Even with list pricing, the price does not often represent the costs. For example from Apple: 32GB iPhone 3GS costs $100 more than the 16GB model, yet a 16GB microSDHC card only costs $50.

njl 17y ago

You seem to feel some sort of moral obligation to price things as cost-plus. "This good cost me $90, 10% profit is reasonable, you can have it for $100." You're upset by pricing based on value. "This good cost me $90, but it's going to save you $500 this year alone, so it is a steal at $250." I guess my argument to you is that the goal is (naturally) to squeeze more cash out of customers. But the customers with more money are presumably getting more value out of the product. For my current venture, we're selling software that helps keep students from dropping out of college. Our effects are measured in additional revenue to the school from students retained. Assuming we manage to provide the same percentage improvement to every school, the value we provide to an institution is going to vary widely. A small community college might have a third of the revenue per student as a private institution, and a small school might have a tenth as many students as a larger institution. My incremental costs aren't really all that much greater from school to school, but the value to the schools vary widely. It only makes sense to provide them different prices.

tptacek 17y ago
The first thing I learned in my first marketing job was never to use cost-based pricing. Nobody prices technology this way in the real world.

DanielBMarkham 17y ago

"sellers either don't know value of their product OR they are always trying to exaggerate it." You have a misunderstanding about value. Sellers CANNOT know the value of their product -- the value of their product is determined by each individual buyer given each individual buyer's circumstances. There is no "universal" value for a product. Products are traded for money all the time at various price points based on millions of criteria. It's this misconception that's causing your problem.

bmelton 17y ago

I see a lot of conjecture about how secret pricing is or isn't beneficial, but one thing that seems to be overlooked is the complexity of enterprise class pricing. If I call BEA (now Oracle) for a portal, the application stack is modular down to app functions, such that if I want publishing in my portal, there's a publisher module. Document repository is a seperate cost as well. I could buy 'just portal' if I really wanted, but without speaking to a BEA sales rep, in the absence of a LOT of prior experience, I simply can't know WHAT to buy. That said, I've always found the 'per-seat' pricing model to be a pretty effective form of price discrimination. $10 a seat means that the 100 employee company is only paying $1000, but the 30,000 employee company pays $300,000. It's fair(ish), and it's an effective way to scale support costs as well without having to pay per hour or incident.

tptacek 17y ago
The problem with per-X licensing is that customers hate it. People will pay more for a flat-priced product than they will for the equivalent licensed version, even if there's a site license available. That doesn't make per-X licensing wrong (lots of web 2.0 startups seem to be doing well with it), but it's something to consider. For instance, consider the fact that the person making the buying decision at a customer might have to deal with a honorous justification, purchasing department, and PO process every time their license needs change.
- bmelton 17y ago
  Interesting. Most of my customers are government, so I guess that's where the difference lies -- they like having a number to point at and say "that's how much it costs". Whether or not it's the cheapest product, it's preferred to ambiguously priced applications. Of course, that's one of the main reasons they invented the GSA I guess.

brk 17y ago

My assumption is that this method is used to get as much as possible off big companies I think that your assumption is grossly inaccurate, and you should probably put some effort into basic sales and marketing concepts. I will tell you that 9 times out of 10, when you think a corporation is trying to exploit some nefarious tactic to rip off some or all of their clients, that the reality is simply that you don't understand the process or are missing some key data point. IE: corporations are not all dark and evil. It's important to understand this and grasp it. Presumably you (the generic you) would like your venture to become large and sustainable and "big" someday. Anyway, others in this thread have done a good job explaining some of the concepts of value-based selling and other reasons why for some products it is impractical to have a one size fits all pricing model. To answer your question, though, one of the benefits of no price tag is that if you were to publish a median price, you might scare off some of your small or large clients from calling up. They would either think the product is too expensive and complex, or too simple and limited for their needs, when in reality neither is true. By talking with a sales agent a price that is fair and accurate for that customer can be established.

dkokelley 17y ago

A hidden benefit to consumers might be seen with complicated systems. If you were told that a complicated system was $10,000 base price, you might be upset that the typical price for the complete system is $30,000. You were expecting to pay one amount, but after realizing what your needs are you have a totally different price. The selling company can't expect to know what you need until you meet with them, which is why you have to meet before seeing a price.

ovidiupl 17y ago

I finally registered on HN to make one short comment: Read "Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles". It's a short, readable book on pricing "for dummies" by Richard McKenzie (UC Irvine). I have zero formal training in economics, and I found the book enlightening. It discusses price discrimination thoroughly - after all, it's a critical component of pricing theory. I, too, find the thought of one buyer paying more simply because s/he can afford the price somehow "wrong". I don't fully buy the explanation in the book (mainly revolving around time opportunity costs, as I see it). But, at the same time, life is not always fair - morality and money are orthogonal to some extent. If this behavior were deemed harmful by society, surely it would be illegal by now? [Edit: Minor Engrish nit.]

JimmyL 17y ago
re: Popcorn - I haven't read the book, but I have helped run a movie theater. The answer, if you're not going to read it, it that popcorn (and the associated food products) is how the theaters make their money. Sure, your ticket price contributes, but it's mostly to cover their constant labor and facilities costs. If a movie theater schedules a showing, it has to run - doesn't matter if there's 2 or 200 people in the theater at the time. The labor to run the show is scheduled far in advance, and represents a sunk cost to the theater. That cost is seen by theater management as the cost of getting people into the building. Once they're there, however, they're pretty likely to buy some food, based on the advertising and how the theaters are designed - which is pure profit (the material cost for a large popcorn is about 2 cents). It has incredible margins, and lasts forever (none of the stuff they serve goes bad). It's similar to how TV works - their core business is selling advertising, and if the cost of business to do that is creating shows that people like, so be it. Put another way, the point of TV shows is to get you in front of your TV so that you'll watch some ads. Likewise, the point of movies is to get you in the building so you'll buy some food.

dejan 17y ago

Your question made me think about the topic thoroughly. I wrote a suggestion what to do, by letting the customer suggest the price. http://www.aleveo.com/ideas/voluntary-price-suggestions http://www.aleveo.com/ideas/voluntary-price-suggestions

whatusername 17y ago

There are other alternatives to no price tag.. Think Tight-Ass Tuesdays, discount coupons, etc.. Some people will buy your product whatever the cost - others will only at a lower price.. To maximise the value/sales - the price spread is a good idea...

rs 17y ago

A slight side step from the main discussion (do apologise for that), but does anyone know whether price discrimination is regulated/protected for consumers ? Just wondering if there's a legal side to it. i.e. is there a limit to how much a seller can price discriminate ? etc