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pricing Martin Lee on 10 Jan 2007 12:31 pm

Price Targeting Your Customers (Part 1)

The Undercover Economistby Tim Harford provides some interesting insights and revelations about price targeting.

The whole idea behind price targeting is to make sure that people who can afford it are paying more for whatever they are buying.

In order to price-target effectively and get the richer people to buy the more expensive stuff, one method is to exaggerate the differences between the best and the worst.

Let us look at some examples to see how price targeting is taken to the extreme in certain industries.

Cinemas

Why are popcorns and drinks priced higher in cinemas then when you buy them at a normal stall?

Cinema owners are smart. They know that most of the people going to cinemas are less likely to be sensitive to price. People going on a date will not want to look stingy.

Travelling

Travelling first class by train or plane is much more expensive than economy class.

The 19th-century French economist Emile Dupuit pointed to the early railways as an example:

It is not because of the few thousand francs which would have to be spent to put a roof over the 3rd-class carriage or to upholster the 3rd-class seats that some company or other has open carriages with wooden benches… What the company is trying to do is prevent the passengers who can pay 2nd-class fare from travelling 3rd-class.

Similarly, you can look at how the airlines are operating to create these differences.

Supermarkets

In supermarkets, the packaging of generic food products are purposely designed to put off customers who can afford to pay more. These customers will then purchase the more expensive branded versions.

Computers and Software

In case you are not aware, price targeting is also deliberately done in the computer industry.

IBM’s ‘LaserWriter E’, a low-end laser printer, is actually the same piece of equipment as their high-end ‘LaserWriter’. The only difference was that there was an additional chip in the cheaper version to slow it down.

This allows IBM to sell the printers at two different prices and get people to buy the more expensive version. Doing it this way is in fact cheaper than designing and producing two completely different printers!

The same thing applies to software. For some software, there is a professional version and a “normal” version for the mass market. You might not know that in most cases, the professional version was actually developed first.

Extra work then had to be done to disable certain functions in the professional version to create the normal version. So in a sense, producing the inferior version actually costs more than the professional one.

I had always thought otherwise!

My next post will look at some instances when price targeting might fail.

In the meantime, start thinking about how you can set different pricing for your products and services!

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