Challenges for developing tiered products

A Good, Better, Best strategy is one that every company should consider (Mohammed, 2018). This strategy implicates that you can read a wider audience and generate more revenue by embracing a tiered pricing approach. When developing a tiered strategy, a common way to go about this is to develop the base product , then subtract features for the “good” tier/price and add features for the “best” tier/price. According to Mohammed (2018), we often underestimate how much the customer is willing to spend. When given the option to decide from several options, the customer will often choose the option they feel they are getting the most value for the price they’re paying (Smith, 2011). If a customer purchasing internet looks at the three levels of speed available. For example: the good version 100 mbps for $10, the better version is 200mbps for $20, and the best version is 300 mbps is $25. The consumer may usually go with the better versions at $20, but decide they get more value for the $25 speed. The implication of this strategy is that the customer will more often than not, trade up.

Price Discrimination

Indirect price discrimination fits into the implementation of this strategy. According to Froeb at al. (2018), “When a seller cannot directly identify who has a low or high value, the seller can still discriminate by designing products or services that appeal to different consumer groups.” By offering a tiered pricing strategy of a similar product, you are indirectly guiding them to one of the product offerings. Instead of offering only one product/pricing structure to a specific group, you are offering them all available options.

Challenges

Companies may face challenges developing tiered products that have enough differentiation or features that can be adjusted. Some businesses may also be fearful of cannibalization to their current business with a lower tier product (Mohammad, 2018). In my retail career, we’ve played heavily into the tiered approach of product offering. We often times tried to create tier pricing with very similar products, where the differences in value (referred to as “fences” by Mohammad) were not strong enough for the customer to trade up to the expensive product. So we found ourselves with a lot of overpriced, low margin, product that we needed to markdown aggressively to sell. There is also a danger of coming up with too many options and confusing the consumer. Mohammad also found that when a customer is presented with too many options, they forego a purchase all together.

Indirect or Direct Price Discrimination?

1. Higher interest rates on car loans for borrowers with lower credit scores – Direct. You are able to identify the members of a group who have lower credit scores and charge them higher interest rates.
2. Charging ethnic minorities (or red lining) higher rates on mortgages and mortgage refinance – Direct. You’re identifying a specific group of people and offering them higher rates
3. Kohl's retailer offering discounts for early morning shoppers – Direct. You are able to identify a specific group and offer them a discount. They will not be able to pass that discount on to afternoon shoppers.
4. Charging higher rates on business loans – Direct. You are looking at a specific group (businesses) and charging them higher interest rates. A busines
5. Volume discounts and/or benefits (example free shipping) – Indirect. You won’t be able to identify the groups of people directly who will be purchasing more. You also can’t prevent people from combining orders to hit a volume number for the free shipping.
6. Charging higher rates on mortgage related financing for borrowers in a certain zip code. – Direct. They are directly identifying a group of people.

Legality

Price discrimination is generally not illegal, but it is governed by antitrust laws. The Robinson-Patman Act governs these laws. According to the FTC.gov, “Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller's attempts to meet a competitor's offering.” However, from the examples above #2 is an illegal form of prime discriminating. Race, gender, age, ethnicity & sexual orientation are grounds for illegal price discrimination. Price discrimination can be justified if the cost of serving the different groups are different of if they are trying to be competitive with competition.

Ethical?

Price discrimination is not the most ethical practice. Mohammad (2018), describes finding features and benefits that a customer will trade up for (or not buy at all), he refers to these as fences. For example, paying for a cheaper concert ticket, but not having an assigned seat could be a fence for someone. If there are legit active differences due to costs of providing a product or service, then yes, price discrimination can be ethical.

References

Price discrimination: Robinson-Patman violations. Federal Trade Commission. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/price-discrimination-robinson-patmanLinks to an external site.

Froeb, L. M., McCann, B.T., Ward, M. R. (2018). Managerial economics, 5th edition. https://bookshelf.vitalsource.com/books/9781337468015Links to an external site.

Mohammed, R. (2018). The Good-Better-Best Approach to Pricing. Harvard Business Review, 96(5), 106–115. http://search.ebscohost.com.ezproxy.library.berkeley.org/login.aspx?direct=true&db=bsh&AN=131356798&site=ehost-liveLinks to an external site.

Smith, T. J. (2011). Pricing strategy: Piercing the veil of value exchange. Ivey Business Journal (Online). Retrieved from http://ezproxy.library.berkeley.org/login?qurl=https%3A%2F%2Fwww.proquest.com%2Ftrade-journals%2Fpricing-strategy-piercing-veil-value-exchange%2Fdocview%2F912141527%2Fse-2%3Faccountid%3D38129Links to an external site.