Yes, you should charge some customers more than others. To understand this concept of “variable pricing,” let’s play a mind game. Imagine you walk into a restaurant, read the menu and discover this new place serves only pork chops. You call the waiter over and ask, “why only pork chops?,” and he responds “our chef has found the average person likes the average meal of pork chops, so we only serve what the average person wants.” You’d walk out, thinking, wow, idiots!
Most companies price goods the same way — setting an average price that an average consumer will find appealing. The old Econ 101 textbooks talk about markets setting prices, with supply shortages or growing demand pushing prices up, and inventory growth and consumer apathy pushing prices down. But the inference is at any one time, there is one perfect price for any one product, because 100 years ago all marketers could do was gauge overall market demand. Adam Smith’s Invisible Hand moved all prices for a given good in one swoop. Companies do this today; when the iPad 3 launches, Apple will likely price it at $500 for everybody.
But why charge everyone the same price? Shouldn’t the tech-geek salivating over the new iPad 3 be hit with a $1,000 bill, because he’d willingly pay it, and the mom at home who isn’t too hot on tech be charged only $300? Their levels of desire are different, so these customers could and should be charged different prices. If Apple could find an even split audience, it would average $650 per unit for that glorious new tablet with retina display — jacking margins up $150 while keeping everyone happy.
Yet even Apple with all its smarts hasn’t figured out how to charge you or me differently based on our individual need states. Variable prices are used by some marketers, but usually only in four blunt ways: (a) a hook to lure in new customers (see magazine “30% off for subscription” deals), (b) discounts that self-select cheapskates (see grocery store coupons that give only those who clip them 50 cents off a can of beans), and (c) incentives to stop customer defection (try calling your cable company tonight threatening to quit to DISH and they’ll drop your monthly bill by $20). These first three ways differentiate customers to either build new acquisitions, solve a problem of a subset hypersensitive to price, or stop churn. What is common is they all threat mass subgroups of customers the same.
The fourth version of price variation is tied to timing — cycling through price hikes or drops. Apple is brilliant at this, rapidly moving all its products through price reductions (say, an iPhone priced at $500, then $400, $300, $100, of course all with backend data subscription offsets) usually timed to push old product inventory as a newer version launches. But again, it’s treating all segments of customers the same at any given time.
But what if a fifth pricing approach, one-to-one pricing, were possible?
If you and I are different people, we obviously want things at different levels. Desire is not a binary on-off switch; we may both want a new pair of cowboy boots, but you kinda want them now and I’m burning to get a new pair. So I’d be willing to pay $200 and you only $100 if marketers could see inside our heads. By setting the price of the boots at $120, marketers are aiming toward an imperfect average — making me happy, and trying to push you up a little in what you’d pay — but I could give them more margin, and you less, for more overall profit if only prices were tied to our individual desires. I should pay $200 and you $100. The average shoots to $150. We’re happier, and the leather-stitcher is richer.
The only thing stopping marketers from reaching a perfect, one-to-one variable pricing strategy has been the inefficient exchange of information. People’s needs and desires change hourly; demand is constantly in flux, rising and falling like a Twitter meme; no computer systems have been able to track this opportunity to the moment, so marketers take broad cuts at the problem, charging first-class airline passengers more for the illusion of cushier seats, or dropping utility bills for new customer sign-ups. The only organizations good at this are B2B groups such as management consultants, who can take the time to carefully scope the hunger of a potential client and price services accordingly. (The technical term for this price approach is FMA, or “from my ass.”)
This will change soon. All that is needed is technology to identify consumers’ “need state” — how much they crave a product now — and output technology to change the price offer.
What are the input technologies? Mobile phones are soon adding NFC wireless technology to become mobile wallets; apps such as Square and others may leapfrog the technology with customer identification tech tied to your bank or credit accounts. LBS pinpoints your location on maps, and the technology is getting so good Google Maps recently began showing the store locations inside malls as you walk around, differentiating whether you are on the first or second floor. Social media connectivity means your personal ID can be had if you walk into a geo-fenced location. Soon, if you walk into a wine store, they will know who you are, what aisle you’re in, what you like, your customer lifetime value (estimated stream of future profits), and your social network.
What are the output technologies? Digital screens, of course, are getting cheap. E Ink and the like could make labels and price tags variable, morphing instantly based on the customer approaching them.
The future is rather obvious. You and I walk into the clothing store, and the leather jacket tag flashes $500 for you if you really, really want it, but only $300 for me if I sorta, kinda want it. Rather than timing mass pricing to mass market demand, variable pricing would dynamically change to maximize the match of consumer desire with marketer profit.
Does this seem unfair? Of course, but treating people differently is part of life. If you have two children, you send them to two different grades based on their age. You give you wife and mother two different gifts for Valentine’s Day. If you coach track, you push the high school athletes at different levels based on their starting endurance and speed.
Changing pricing to an individual, one-to-one level is simply marketing efficiency taken to the ultimate conclusion. Technology will soon make it happen, just as certain as the coupon in Sunday’s newspaper will let you buy coffee at the supermarket for 35% off while I pay full fare.
One-to-one pricing will happen. I probably shouldn’t have confessed I really want those cowboy boots.
Image: Jef Safi