
Ask HN: Price discrimination - yrashk
Hi,<p>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.<p>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.<p>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.<p>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.<p>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.<p>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).<p>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?
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bokonist
_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.

~~~
babyboy808
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
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.

~~~
kleinsch
This is becoming prevalent in the world of game engines, where the engines
sell for big money, but companies making under $100K per year can buy for a
few thousand (Look up Unity 3D or Torque for more info).

It serves as promotion and builds a much larger community for the engine
developer. It also lets them get money from the mass-market, as usually the
indie licenses come with less support requirements. For the big name
publishers, they make a lot of money but provide the support SLA, custom
development or source code access.

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DanielBMarkham
"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.

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ErrantX
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
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
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".

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njl
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
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.

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bmelton
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
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
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.

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

~~~
tptacek
It's also called "market segmentation" and "product line management".

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weaksauce
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.

~~~
tptacek
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
_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.

~~~
tptacek
Almost every enterprise product is "solution priced", with no published price
list. You're getting upvoted because people don't like solution pricing, and I
don't blame them. We're not doing it either.

Your general buying approach is probably sound most of the time, because the
companies who publish their prices are usually the price leaders. In most
markets there's a price leader (Honda), a premium leader (BMW), and a couple
of niche players. Going wide with an attractive price list is the right call
for the price leader.

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brk
_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.

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dkokelley
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.

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ovidiupl
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
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.

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rs
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

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whatusername
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...

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dejan
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>

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rythie
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.

