Long back - almost 16 years from now - when I first read [to understand] micro-economics, the concept of first degree differentiation appealed to me quite a bit. A stated price for a product – is actually restrictive. Necessarily puts in the cost plus category. The key is to go for value pricing, that is have an individual customer pay as much he or she can pay. To make it graphic – the price of a soap is not bar-coded to the soap, but the to PAN No or any other unique no [ooops!!] of the customer.
Different companies do it differently. Hotels have different categories of room. With a wee bit extra feature thrown they charge a good deal extra for a different room. Or an ERP co [;)] can thrown in lot more services to live up to the jingling budgets. Or our local trinket shops owners or auto drivers will wear an infra red glass and try to gauge the threshold limit of the prospective customer; some other smart alec – would start pricing from the roof and start coming down in small steps after duly probing the customer [quite ingenuously] at every level. There are a 1001 ploys people play [largely unsuccessfully and some few times successfully – that make them play the game again and again]
Very interesting but awesomely difficult to practice. Why??....because there is an element of duress and regulation involved in it. Like in the case of progressive taxation, which is a classic case of first degree differentiation. There is always an innate satisfaction to beat the system. Therefore people will make all sorts of schemes and make all sorts of games to avoid. Exactly the stuff you see in tax management or evasion –whatever you call it. For me it is the same. A game people play to avoid a rule. Not that they don’t want to fund the exchequer. Maybe many [definitely some] of those people, would be doing charity or wanting to do charity a good few times the money they save by a smart sleight of the xl sheet.
But there are many instances where first degree differentiation works awesomely beautifully. However, there are a few conditions. The first and foremost – is lack of duress. It must be voluntary – play into the magnanimity of the people. Don’t ask for it. Like in giving TIPS. Let people give tips, as much as they want. It may not work always; but I guess many places it works. Especially, when the other pre-requisites of free pricing are in place.
The critical condition is, excellence in experience. Either real or perceived. There needs to be something magical in the moment to create a sense of elatedness. In such a case people want to give. Feel good and satisfied by giving. It works kinda of a sense of memorabilia. The excellence in experience rubs off on them and they want to participate in that lovely moment as a benevolent giver [well am making it sound crassly Freudian], but the message it. Great experience can trigger magnanimity or benevolence whatever we call it.
The third pre-requisite – is a well off target audience. A sense self sufficiency and surfeit needs to prevail in the beneficiaries. They needn’t be in a sense of perpetual sense of have not of the basics. The beneficiaries, should be comfortably able give a healthy amount, without batting an eyelid. Else, they will probably end of paying/giving same or less than a basic necessity [something like in duress] and not for something that gives them a sense of elatedness.
Well – do you get an answer why spiritual guru’s and yoga teachers have access to hundreds and thousands of crores of rupees. The last pre-condition, also explains why all of them have abodes in the western world. The example, runs the risk of sounding a bit crass. But believe me, the idea is to explain a point through exaggeration – that magical, high quality service can be priced free to maximize wealth. Especially, when we have a few other pre-requisites in place.
Many times, I have wondered where all this pricing can work. In the sense, where free pricing can generate more revenues than a fixed, stated price. One place, I think it can work is in education. I think IIMs, IITs and other high quality institutes will be better off having first degree differentiated pricing. Either have free education and let people pay as much as they want to pay through out their life. Or maybe have a small percentage points of their salary paid every year in lieu of free education. Various other variants would work. There could also be hybrid models – depending upon context [i.e offering, costs and industry]. I have a strong hunch, as many customer segments are getting more affluent and with a general sense of security and assurance increasing in the society [at least in many pockets], there will be more and more examples of free or semi-free pricing [telecom is getting close to that – a side door manner though]. This will not just promote social equity but will also maximize wealth.
In a different language, I am probably re-stating an old fashioned way of saying, don’t ask. You will get your due – many times over, if you have done your Karma well. Asking might just restrict the upside as it may sometimes seem to belittle the efforts. All the Rolls Royce’s speak louder than blogs.
Bhubaneshwar
August 22, 2010
Different companies do it differently. Hotels have different categories of room. With a wee bit extra feature thrown they charge a good deal extra for a different room. Or an ERP co [;)] can thrown in lot more services to live up to the jingling budgets. Or our local trinket shops owners or auto drivers will wear an infra red glass and try to gauge the threshold limit of the prospective customer; some other smart alec – would start pricing from the roof and start coming down in small steps after duly probing the customer [quite ingenuously] at every level. There are a 1001 ploys people play [largely unsuccessfully and some few times successfully – that make them play the game again and again]
Very interesting but awesomely difficult to practice. Why??....because there is an element of duress and regulation involved in it. Like in the case of progressive taxation, which is a classic case of first degree differentiation. There is always an innate satisfaction to beat the system. Therefore people will make all sorts of schemes and make all sorts of games to avoid. Exactly the stuff you see in tax management or evasion –whatever you call it. For me it is the same. A game people play to avoid a rule. Not that they don’t want to fund the exchequer. Maybe many [definitely some] of those people, would be doing charity or wanting to do charity a good few times the money they save by a smart sleight of the xl sheet.
But there are many instances where first degree differentiation works awesomely beautifully. However, there are a few conditions. The first and foremost – is lack of duress. It must be voluntary – play into the magnanimity of the people. Don’t ask for it. Like in giving TIPS. Let people give tips, as much as they want. It may not work always; but I guess many places it works. Especially, when the other pre-requisites of free pricing are in place.
The critical condition is, excellence in experience. Either real or perceived. There needs to be something magical in the moment to create a sense of elatedness. In such a case people want to give. Feel good and satisfied by giving. It works kinda of a sense of memorabilia. The excellence in experience rubs off on them and they want to participate in that lovely moment as a benevolent giver [well am making it sound crassly Freudian], but the message it. Great experience can trigger magnanimity or benevolence whatever we call it.
The third pre-requisite – is a well off target audience. A sense self sufficiency and surfeit needs to prevail in the beneficiaries. They needn’t be in a sense of perpetual sense of have not of the basics. The beneficiaries, should be comfortably able give a healthy amount, without batting an eyelid. Else, they will probably end of paying/giving same or less than a basic necessity [something like in duress] and not for something that gives them a sense of elatedness.
Well – do you get an answer why spiritual guru’s and yoga teachers have access to hundreds and thousands of crores of rupees. The last pre-condition, also explains why all of them have abodes in the western world. The example, runs the risk of sounding a bit crass. But believe me, the idea is to explain a point through exaggeration – that magical, high quality service can be priced free to maximize wealth. Especially, when we have a few other pre-requisites in place.
Many times, I have wondered where all this pricing can work. In the sense, where free pricing can generate more revenues than a fixed, stated price. One place, I think it can work is in education. I think IIMs, IITs and other high quality institutes will be better off having first degree differentiated pricing. Either have free education and let people pay as much as they want to pay through out their life. Or maybe have a small percentage points of their salary paid every year in lieu of free education. Various other variants would work. There could also be hybrid models – depending upon context [i.e offering, costs and industry]. I have a strong hunch, as many customer segments are getting more affluent and with a general sense of security and assurance increasing in the society [at least in many pockets], there will be more and more examples of free or semi-free pricing [telecom is getting close to that – a side door manner though]. This will not just promote social equity but will also maximize wealth.
In a different language, I am probably re-stating an old fashioned way of saying, don’t ask. You will get your due – many times over, if you have done your Karma well. Asking might just restrict the upside as it may sometimes seem to belittle the efforts. All the Rolls Royce’s speak louder than blogs.
Bhubaneshwar
August 22, 2010
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