Barclays' Visa Black Card has a $495 annual fee. Should you, too, raise prices?

Our first thought after opening the mail to see an invitation to the Visa Black Card of Barclays Bank Delaware was, Wow, a credit card with a $495 annual fee, do these guys know we're throwing a recession here? After chuckling, we then did the math, and realized a direct-mail piece that cost $0.50 and had even a low 0.25% response rate would attract accounts at a $200 cost per sale -- meaning the $495 fee would pay off quickly even if almost no one responds. The Black Card, if you missed it, is Barclays' slightly downscale version of the black AmEx Centurion Card, a hyper-elite credit tool that allows you to basically buy your own private island. Barclays' edition comes with a concierge service that can help you find things like rare books, perhaps useful when alone on that island.

If all of this seems pre-economic-apocalypse-bubble-ish, there is an important lesson here: Perhaps your organization, too, should raise your prices. Barclays is simply positioning credit as an elite club, with a compilation of value-added services that might seem expensive to us, but to others is just akin to dropping $500 for a good night out. There's no harm here; only those willing to pay will reply, and then pay well they will.

This strategy is called price differentiation, charging some customers more for the same basic service -- as seen in every airline seat configuration. The guy and lady in first class get a glass of wine and a few extra inches of room, and in exchange for that $5 freebie they pay hundreds of dollars more for the same miraculous transport from NYC to LA.

Price differentiation is extremely efficient. It feels unfair at first, so play this game: Imagine you are trying to sell an old Beatles record. To your wife, it's worthless; to a collector who realizes it's a rare edition, it's worth $5,000. The collector will get much more perceived happiness from it, so if you find him and charge a small fortune, you both get an equitable transaction. In any supply of goods, some value the supply more than others -- shouldn't they pay more for the privilege?

Walk into a grocery store and see this in action. The woman in front of you pulls out a coupon and gets 50 cents off a can of soup. You don't. You're busy, you don't have time to clip coupons, so you value the discount less. You and that lady have just paid two different prices for exactly the same can of soup. The grocery store has optimized its profits by wringing more cash from you than her. And you both feel OK about it.

Charging similar customers differently for nearly the same product or service is a fine way to raise margins. In a perfect world, you might charge each customer a unique price. The trick is to attract the best customers willing to boost your profits without upsetting the masses. We say, try a Visa Black Card.