Recently, I saw a controversy on facebook regarding
thetrainline.com’s use of cookies in determining ticket prices online. This
meant they were using consumer’s browser history in order to determine train
prices and charge a premium price to customers who had used the service before
or those who were frequent users of the website. Clearly when consumers found
out there was an outrage and a number of disappointed posts on their facebook
and website pages. I feel as though their public relations department dealt
terribly with the situation- not issuing a formal apology and even DELETING
negative posts. However, I am not concerned with the public relations in this
case (see previous blog post), yet the fact that as this has just come to
light- consumers are astonished to find this kind of technology in place. Yet
it has been used SO many times before, not just online.
This sort of exploitation is called ‘unique target’ pricing strategy
also referred to as ‘first degree pricing discrimination’ and uses simple
economics. Amazon hit the spotlight for using the method a number of years ago,
when two customers were charged different prices for the same products when
based on their previous purchases. However when cookies were deleted the prices
dropped and once consumers realised this there was an outcry, which resulted in
Amazon having to change their pricing strategy and stop using the ‘unique
target’ approach.
Yet, outside of the online retailers world this careful
analysis of a unique customer who is willing to pay a higher premium on a
product is in action constantly. A good salesperson can put a higher premium on
a car or a house, simply by analysis their customer and determining the price
they are prepared to pay for it. Think of when you go to buy a coffee at starbucks
for example, a cappuccino might cost you £3 or a hot chocolate £3.20, yet a caffé
mocha for £3.40 is just mixing the two together. You can then increase the
sizes for an extra 50p, or add caramel for an extra 30p etc.
The fact is- the cost to add extra chocolate powder, caramel
sauce or a bigger cup is very minimal is terms of Starbuck’s variable costs,
maybe a few pence- yet the higher mark-up transferred to the customer is
considerably more. This reflects the fact that people who are willing to pay more
for their cup of coffee will choose these extras to bump up the cost- rather
than those who are looking for a budget drink who choose to pay for the bare
minimum product.
Another example is tickets- OAP’s and children are usually
charged less for certain tickets, not because the services provided to them
cost any less. They take up the same amount of room on a bus or at a football
match for example, yet offering different prices to members of these distinct
groups seems reasonable? This is due to the price-sensitivity of the individual
members of these groups. Adults are prepared to pay more for their tickets, as stereotypically
they have a larger disposable income.
Clearly, this strategy relies on collecting a lot of
information about potential customers and isn’t popular with customers who
realise it is being used, yet due to the increase in the development of new
technologies, it is becoming increasingly popular and provides companies with
an easy way to target a number of target audiences and obtain higher profits.
A fab book which goes in to this in a lot more detail is “The
undercover economist” by Tim Harford- a must read for any business student.
