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Unfairness in Pricing: The Danger of Price Segmentation

Posted by PriceBeam on April 6, 2017

 

Two monkeys are fed cucumber. They happily eat it. Then, one gets a grape will the other is still fed cucumber. All of a sudden that the monkey getting cucumber becomes upset and refuses to eat the cucumber: In fact, it starts throwing it at the zoo-keeper. Because it feels that it is being treated unfairly.

This is a great illustration of how consumers' minds work. $10 for a cinema ticket may seem attractive at first, but if it turns out you're paying $5 more because you're wearing a suit, you walk away. 
For the pricing practitioner, price segmentation is a powerful tool. It allows you to group your customer base according to willingness-to-pay and greatly increase profits: And that's how every businessperson should be thinking. If everybody is paying what they are willing to, they stay happy and your business stays sustainable. The problem occurs, when you let people know.

Even if your price is a bargain, your customer is willing to give up a great chunk of utility to avoid being treated unfairly. Generally, consumers do not want to contribute to a business that treats other customers better than they are treated themselves.
In an experiment conducted at the University of Cologne, pariticpants were faced with the following payment options for a tedious piece of work which they took out in collaboration with a stranger, with whom they had no interaction with whatsoever (And so, no personal relationship):

1) You and your coworker are both paid $5
2) You receive $10 and your coworker receives $20

A majority of participants chose the first option, irrational as it may be. That's how the consumers mind work, and if you use price segmentation, you better make sure to hide it.

Accepted Uses of Price Segmentation
On a final note, there are, of course, widely accepted forms of price segmentation such as discounts for students and pensioners. However, if you start segmenting your customers into more specific groups, you need to hide it! Else, you'll lose lots of customers with high purchase power.

Written by PriceBeam

PriceBeam
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