R. Preston McAfee Kicks off 2008 Big Thinkers India Series
After a successful debut year in 2007, the Yahoo! Big Thinkers India series saw a return this year, with researcher R. Preston McAfee kicking off the 2008 series. His talk on “Pricing” brought together a broad range of attendees from research and academia, over 600 in total, including representatives from Microsoft, Google, IBM, Amazon, Infosys, Wipro, Oracle, and a host of others from the region. Several members from the media were also present. Organized by Yahoo! India Research & Development, the event was held at The Grand Ballroom, Leela Palace in Bangalore.
McAfee provided the audience with an in-depth look at how companies determine prices for consumers and the theory of price discrimination, or value-based pricing where customers are charged based on their characteristics such as age, profession, and location. McAfee explained that price discrimination exists in two forms: direct and indirect. Direct price discrimination means charging different customers different prices for the same good, or value-based pricing. Indirect price discrimination enlists the help of the customer in the effort to charge customers a different price, such as coupon clipping.
There is also the “damaged goods” strategy of pricing, where companies charge less by offering customers less, such as giving them a lower-quality product. An easy way of lowering the quality is to damage the good. McAfee cited an example of this with IBM. During the late 90’s, they launched a printer known as the LaserPrinter E to compete with HP’s consumer-oriented laser printer. They added chips to the printer to slow it down so that they could charge a lower price for it.
McAfee then launched into a discussion about how the airline industry offers some extreme examples of price discrimination. A presentation slide appeared before the audience showing two extremely different prices for a roundtrip ticket to Austin from Los Angeles: $2,200 and $420. The cheaper fare includes a Saturday-night stay over for each trip. This stay-over requirement is exactly the same thing as damaging the goods. The restriction doesn’t save the airline any money, because exactly the same seats are being occupied, but it deters some of the business travelers who don’t want to spend the weekend away from their families, which allows the airline to charge them more. He made some recommendations for buying airline tickets based on the price discrimination practiced by the airline industry. Since prices vary so much, he advised the audience to be flexible in schedules and airports, check for flights frequently, and to book more than a month in advance.
McAfee concluded by suggesting that complex, targeted pricing and the sorts of “damaged goods” strategies are likely to grow in popularity. From the consumer’s perspective, he pointed out the significance in shopping around and searching, as “competition may naturally give rise to price volatility” and the savings from shopping around can be significant. For businesses, pricing is central to profitability, but many businesses make the mistake of favoring marketing and product promotion. They should instead reward loyal customers and think about the basis for price discrimination. What causes some buyers to be price sensitive, and how can a price cut be targeted only to that group? Pricing can then be optimized for various groups, a pro¬cess that has important implications for marketing channels, promotional vehicles like introductory offers, record-keeping, product design, and packag¬ing.
Video is available at http://bangalore.yahoo.com/bigthinkers/event_march05_08.html.
