Sunday, November 7, 2010

Personal Pricing aka First Degree Price Discrimination

Here's an example of firm hoping to put personalized pricing to work.

Is this incentive compatible?

It would be interesting to see how Meineke consumers respond in practice -- I suspect there may be a variety of forces as work.

HT: Dan Sills


  1. I'm just registering now :)

    Kudos to Meinekie for trying this - I wonder 1)how much the the customer service costs will increase 2) what friction will keep some customers paying regular price. 3) what cross sell opportunities will be created (once you have the car in, it's very little cost overhead to change the oil, wipers, notice the need for X, Y, and Z work that needs to be done. etc)

    I'd guess this business would have high fixed costs, and relatively low marginal costs - but their facilities only have a limited capacity. Also, getting a car schedules, in, and out of the bay, and keys handed over is a relatively large fixed cost per transaction - if they can cross sell other work and distribute this fixed transaction cost - they may have a winner. I just question their ability to manage all the dickering surrounding this.

  2. ...Apologies for the double post... but while writing about something similar this morning, I started thinking about Transparent Price Discrimination- that is price discrimination that does not require asymmetry of information.

    Past examples of this might be - volume purchases, bundling, and coupons, etc. (Price discrimination based on trade barriers might also fall into this category but globalization is picking away at this). On the other hand, there are other examples of price discrimination that requires asymmetry of information. The internet is obviously making this second approach more difficult (re: the Amazon experiment); therefore techniques of justifiable price discrimination (in the face of full disclosure) are arguably becoming more valuable.

    If what Meineke is offering is a custom bundle with custom (and incomparable) pricing, and the customer perceives it in this way… then this might work for the (good public relations at least).

    If Meineke is perceived as price discriminating, then this would have to be justifiable in the face of full disclosure of what people of paying.

    So it will be interesting to see how customers will react. Will they see this as any price differences as “different products”, or if not, will they see this as justifiable price discrimination (ahem, I mean “customization”)

  3. This is a gimmick. The catch in the ad is "We’ll do our best".

    Some customers are going to walk in there, request a price lower than the basic option and Meineke's strategy will be to up-sell them to the basic package.

    Meineke will need to make a profit on each sale and so it will not honor every price a customer states. Moreover, Meineke will not put crappy brakes on a vehicle and take on the liability that someone can get hurt because of crappy breaks.

  4. I agree that this is a gimmick, and does not truly represent first degree price discrimination.

    Personal pricing involves the knowledge of the value for each customers' willingness to pay. I don't think you can get it by straight out asking them for that value. A number of companies employ such tactics, but will a customer really give that information away if they know it will be used directly in subsequent transactions?

    This marketing scheme might actually backfire, in that customers may second guess any price they get from Meinekie, and just feel being treated unfairly regardless of the price they get.

  5. In response to the comment by Leonides, it actually may be possible to get to nearly perfect price discrimination IF:
    - the consumer can make another offer if the initial/previous price offer was declined.
    Priceline does that. They should have a pretty good idea of the average prices offered by users for a given transaction unit (say, direct flight NYC-London on Tuesday night of the first week of November on British Airways) AND probability that the average user offers another bid after the initial one was declined. Priceline also knows what the average bid-to-bid increment is. After several iterations of bid-reject-bid again-reject-bid-accept, there's a good chance Priceline reaches the willingness-to-pay level.

  6. Even though they call it personalized price, it doesn't have characteristics of it.

    First, "Personalized pricing" should be based on different customer value for the same product. But for the brake, how much the value could be differ? It is just for a typical buyers who just want a better deal, not for buyers who is willing to pay for what they value for the product (the brake system).

    it's "break system" we are talkin about here, which has physical cost in it. That means there is not that much room for the store to adjust their price for the break system unless they are using the cheaper ones, which may not exactly match to what the cutomers expected when they mention their willingness to pay.

    Lastly, even though there are some people who argue this is a good example of personalized pricing, they will not be sure whether this is going to be a successful model. Reason? Just too much hasle. There won't be many people who want to negotiate about price of the product that you are not so familiar with. Also if the product that you are negotiating for the break system that's related with your safety, the chance will be even lower. So... why bother?

  7. Jimmy Park,

    I agree that this will most likely not be a success. I also think the effort in dickering will outweigh any of the benefits. I also think that customer will find this unjustified price discrimination. When customers can compare product sales directly ("What! My neighbour with the same year make and model Honda paid 25% less than me!!"), I'm not sure they will be alright with knowing someone got a better deal than them - not matter how well off they feel. Also, I don't think there will be enough "shame" to limit the number of people that will want to dicker.

    I suspect that this will be a program that will fade into the background over the next few months.

    (But...I have noticed a peculiar behaviour in myself and others - once the product price becomes flexible, there can be a tendency to buy more... I found this with my last vehicle purchase. I dickered hard on the base price, then added just a few options - many of which I'm sure had much better profit margins for the dealer)

    Also, do think it’s interesting on how the car industry (and others) can manage to segment and differentiate seeming undifferentiable products and services. For anyone who's worked on their own vehicle, you'll probably agree there is always something better that can be purchased... and the industry leverages this propensity for us to succumb to this slippery slope. Walk into a your local car parts store, and look at brakes. There are brakes that meet minimum quality standards and are just fine, but you'll probably have a conversation something like this... "sure you could by those cheap brake pads, but for x% more you can buy the new carbon xyz supreme alloy backed brake pads... they don't cost that much more. I know I wouldn't want to risk my family’s life on some cheap brake pads".

    Geesh, I just replaced my headlights with some "superduper" headlight bulbs that cost 5 times as much as the regular (The difference between $60 versus 12$ for the added safety seemed like a good deal - frankly I don't find there's much difference.)

    I'm also still perplexed why people still buy premium gas - and probably even more so for people the buy the middle grade. But, I still try to remain observant that consumers behave this way - and it's good fodder for contemplation (food for thought.

    I'm still impressed that Meinekie is trying this - there may still be something interesting they will learn/find that =can be leveraged.