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Featured Guests
- Anand Krishnamoorthy – Associate Professor of Marketing, UCF College of Business
Episode Highlights
- 1:10 – Opaque Selling
- 4:11 – Examples of opaque selling in the marketplace
- 10:59 – The truth about “list prices”
- 14:25 – The shopping experience and its influence
- 19:51 – Price matching
- 27:52 – The New York Times: Charging more for less?
- 35:13 – Variable ticket pricing
- 39:33 – Paul Jarley’s final thoughts
Episode Transcription
Anand Krishnamoorthy: This is something that many of us on the State side may not be familiar with. Eurowings is a German low cost flyer that doesn’t even tell you what your destination will be, before you pay up. You will not know where you’re flying to until you pay up.
Paul Jarley: Here’s a tip for value conscious holiday shoppers everywhere. You probably don’t want to buy two tickets on that airline. This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, “Is this really a thing?” Onto our show.
Paul Jarley: Everybody knows that person who will go to great lengths to get a deal, but is a deal ever really a deal? We’re bringing back our retail guru, Anand Krishnamoorthyorthy to explain to you that a deal, well, probably isn’t really a thing. With pricing games, there’s always a loser and Anand explains, that’s usually you, listen in.
Anand Krishnamoorthy: What I’ll do today is talk about three broad topics in pricing games. The first of which is what we refer to as opaque selling, where product attributes are hidden. Then we’ll talk about where pricing cues are hidden. We’ll start off with something that firms do a lot of, which is cost plus pricing. Some of you are familiar with this term, at least you’ve used it in the past, which is, you figured out your cost, tack on a markup, and then figure out your price based on that.
Anand Krishnamoorthy: Many firms practices, but if you ask them, they will not admit to it because it’s a decidedly unsophisticated way to price. So why is it a problem? Let’s start one, you’re pricing based on things that consumers have no idea about. Consumers usually don’t know what a firm’s costs are. Even if they knew, why would you care? Why would a firm’s production process of manufacturing plant factor into how much you’d be willing to pay?
Anand Krishnamoorthy: As a way of maybe channeling venture payroll’s book, it’s because costs don’t care about consumer feelings. Costs are based off of things that consumers don’t care about at all. It is consumers wanting benefits, consumers wanting other attributes, et cetera, rather than costs.
Anand Krishnamoorthy: To put it another way, if I’m inefficient, and I work for you and I take three days to do a job that you expect done in one, would you pay me three times as much? No. Then why would you expect firms to pay for consumers in terms of costs? Consumers do not want to compensate firms for their ineptitude, why would you expect cost to drive pricing?
Anand Krishnamoorthy: So then perhaps better ways to price would be, price based on consumer benefits. That is, figuring out what consumers want, price based off of that. Consumers would want that, ideally. The problem is, consumer benefits are very hard to figure out. In fact, many a time, consumers themselves have to be educated before they can learn the benefits of using products. If it’s hard for one consumer, it’s even harder for so many different types of consumers who want so many different things in products. So then perhaps, the right way to price should be based on what a consumer is willing to pay.
Anand Krishnamoorthy: Problem is, you can’t sell everything at an auction. So short of that, how do you figure out what each consumer is willing to pay? And as an example here to the second point, let’s say I know that the people on the left side of the room are willing to pay $50 for something. The people on the right side are willing to pay $70 for something. If I were to charge $50, all of you will buy. But the people on the right have gotten a price cut of $20 when they did not need one. If I charge the price for the people on the right, none of you on the left will buy.
Anand Krishnamoorthy: So the idea is to figure out what we can do so that everybody buys, but at different prices based on different tokens of attributes. That is what we refer to as, price discrimination or differential pricing. Understanding what consumer preferences are like and charging different prices based on their willingness to pay.
Anand Krishnamoorthy: All right. So three topics I’ll take up here. The first of which is opaque selling. Many of you have experienced this. So a couple of examples to lead you through that. Opaque selling is where some product attributes are hidden from consumers. A common example is Hotwire with its Hot Rate hotel. You see that a number of choices are revealed to you, but, which hotel you’ll be staying at, is not revealed to you. You know the price you’ll be paying you per night. You don’t know, which hotel you’ll be staying at.
Anand Krishnamoorthy: This is something that many of us on the State side may not be familiar with. Eurowings is a German low cost flyer that doesn’t even tell you what your destination will be, before you pay up. So you pay up and then you’ll figure out where that destination might be. Just so you know, it flies too many cities in Europe. It’s not just one or two cities. It’s flies to 50 cities in Europe, but you will not know. Their blind booking is where you will not know where you’re flying to until you pay up.
Anand Krishnamoorthy: This is not just in airlines. It’s also common with service providers or hotels themselves. And you’ve seen many cases where bed type may not be guaranteed, or the type of room may not be guaranteed, with a rental car it’d be manager’s choice where the manager decides what kind of a car to provide and so on.
Anand Krishnamoorthy: Anybody know what this is? So this is a case where what you get in the bag can be one of six different SpongeBob Minifigures. Squidward, different Spongebobs, well Mr. Krabs, what have you. The idea being, you will not know what is in the bag until you pay up and rip up the bag. It’s called a blind bag. You will not know what is in there. It could be one of any six of these. It’s not easy to figure out because these are all common small Lego blocks. You can’t feel and figure out what’s in there.
Anand Krishnamoorthy: But if you have a kid, you know that the kid is not going to be happy with any one of these. The kid wants just one of these, perhaps the Squidward, or squiliam, what have you. So then the point is, how does one deal with this? Because are you going to buy hundreds and play the odds? Because they themselves tell you that some of these are ultra rare, mega rare and all that. So it’s next, and your kid wants that, that’s for sure. So how then do you play the game? That is what we call opaque selling, where product attributes are hidden from consumers. Only after you purchase, will you find out what you get in the product.
Anand Krishnamoorthy: Usually, it works for what we call deal seekers. That is, if you don’t have strong preferences, that is, if you don’t care about the type of hotel you’ll be staying at, you only care about the price per night, or you only care about free breakfast, et cetera. When you don’t have strong preferences, that’s perhaps when this works. It enables firms to price discriminate. We’ll talk about that a lot in some time.
Anand Krishnamoorthy: What are the challenges for consumers and for firms? For consumers, the biggest challenge is one, the satisfaction that is, invariably you buy something that you don’t like after the fact. So let’s say for on Priceline you book a flight and then you find out that it has two layovers in God knows where. So the point is then there’s a lot of dissatisfaction. You don’t get what you had hoped for. Usually, in all of these cases, there is no refund or return. So if you’re unhappy with it, you cannot return the product. Consumers don’t like that kind of uncertainty.
Anand Krishnamoorthy: For the firm, a lot of pricing is predicated on product differentiation. That is knowing that one kind of offering is better than another so that it can direct consumers to different types of offerings. Here, since the product is opaque, it’s not differentiated.
Anand Krishnamoorthy: How can we make it work? There are three broad ways how we can make it work. One is, you ask consumers what they want. When it comes to a flight, you ask consumers, “Are you willing to have two or more connections, layovers,” et cetera. So when you do that, consumers reveal what they want or perhaps what they don’t want and then dissatisfaction tends to be lower, and the firm can price accordingly. If the firm knows what consumer preferences are, perhaps pricing can be easier.
Anand Krishnamoorthy: The other point, which you’ve seen a lot in our hotels and airlines is one of revealing some information, which is, when you go try to book a flight, you will innovatively see a line that says, “Only five seats left at this price,” or, “Only two hotel rooms left at that price.” What that does is it creates a scarcity mindset in the consumer. “So if I don’t buy now, perhaps I will not have anything tomorrow.” So that drives firm demand.
Anand Krishnamoorthy: And finally, add on pricing or what we call option based pricing. Blind booking from Eurowings does this, which is, if you absolutely don’t want a layover and say Hamburg, then you can rule that out as an option. So if you have options that you absolutely do not want, you can rule that out for a fee. All right? So you pay a premium to be able to rule out some options. And for those consumers who want clarity in what they’re getting, the firm can leverage off of that.
Anand Krishnamoorthy: This is something that you probably have observed on, I think, this is Priceline where you don’t know, which hotel you’ll be getting. It tells you that it will be one of maybe six brands. You’re also told where on the map these hotels will be located. It will be one of these three. You’re told that it’s one of these, you will not know, which. So then, if you’re smart, if you’re good with Google maps, for example, you could maybe spend 10 minutes and figure out what exactly these are. You will still not know, which one it is exactly, but you’ll be able to figure out which of these three they are. All right.
Anand Krishnamoorthy: Where does that work? It works usually when consumer preferences are all over the map. For example, some of you want rating, you care about the hotel rating. The brand isn’t important. Some others are loyal to a brand. You care only about that. Some others care about free parking, free breakfast, et cetera. When consumer preferences are all over the map, then you see different levels of opacity, because firms can capture more value.
Anand Krishnamoorthy: Opacity varies with time. Usually you see all of these opaque selling strategies, not three months in advance, not six months in advance, one week before things materialize. Because what usually happens is firms are under pressure to get rid of the present mentoree. If a hotel does not rent out a room on that date, there’s no revenue. If a seat goes empty on a flight, there is no revenue, when inventory is perishable and that deadline approaches, that is when firm can leverage this kind of opacity.
Anand Krishnamoorthy: And finally, as we have hit on multiple times, not everybody can find out more about what’s going on with opaque products. On the map, for example, if you have no clue where about Boston, perhaps you will not know where these three hotels are, then it doesn’t matter at all that the firm is revealing those three hotels. If you’re good with maps and locations, et cetera, perhaps it benefits you. Then it is the uninformed consumers who tend to pay up more than those that are informed.
Anand Krishnamoorthy: This is something that I want to hit on because this is work I’ve done that talks about when product attributes are well known, but prices are hidden from consumers. I’ll give you a few examples here. This is a TV from Amazon. So what it says up there is, “To see our price, add the item to cart.” You might think, “Well, adding the item to cart is just one button that I click there.” Not so much, because when you do this on Amazon, you’re forced to sign up for an account. Well, you might say that I’ve been a prime member since when Abraham Lincoln was president. So that’s it.
Anand Krishnamoorthy: But the point is, is this something that only works with Amazon? No. Every retailer under the sun does this, which is, add the item to cart before price can be displayed. It’s clearly a cost for consumers to figure out what the prices are. Once you do this sign in and login, you’ll find that the price of that TV is about $1,097. Now, let’s go to Crutchfield, a well known audio video retailer. The price is the same. It’s prominently displayed on the website. There is no adding to cart shenanigans.
Anand Krishnamoorthy: Likewise, with B&H, another popular photography and audio video website, the price is prominently displayed. Dell, has an even lower price that is displayed, not hidden. Why are different retailers hiding prices from consumers and some retailers not? So perhaps the argument is cost based. That is, if I were to hide prices, perhaps it’s less costly for me to advertise prices. Not the case, because in most of these cases online, how much effort and costs that’s putting a price there really take? Instead of putting this long texts that says, “Add the item to cart to find out the price,” just put a number in there. It should be much less expensive to do. So cost is not what is driving it.
Anand Krishnamoorthy: This is something that really bothers us as researchers, which is usually the retailers that hide prices happen to be low price retailers who should be jumping up and down telling consumers about what their prices are. If you he low prices, tell consumers about it so that consumers can then buy at those low prices. Why are these retailers hiding prices? The most common reason for that is manufacturer gaming. That is manufacturers do not want retailers to advertise a price that is lower than a threshold because it reveals bad product quality, for example. It denotes a negative connotation.
Anand Krishnamoorthy: So keep in mind, this is not the price being charged. Manufacturers cannot mandate that you charge a particular price, that’s illegal. What they’re doing here is they are forcing that a retailer not advertise a price lower than that MAP, not the price being charged. That’s not what we observe in our research. We find that in some cases that the hidden price is actually higher than the prices at other retailers. It’s not a lower price that’s being hidden. That’s one thing.
Anand Krishnamoorthy: Two, as we signed the examples, the same price is being hidden by some retailers, but reveal by others. So retailers appear to be playing games in terms of whether to show the price or hide the price. So there may be something else going on here. So I want to talk about one aspect here, which all of you are familiar with, which is what we define as a retail service. That is retailers don’t want to just sell products to you. They also want to provide service. What does the service entail?
Anand Krishnamoorthy: In the case of brick and mortar stores, it’s having tons of product on the shelf, on the floor, for you to look at. That’s expensive to do. It’s there for a reason because if you want to buy a TV, there is no way you’re going to buy a TV without having looked at the picture quality, audio system, and so on. So it’s not just the case that it only happens in brick and mortar stores. Even online, you know that some websites have dedicated chat agents who are well trained in product support and so on. It’s not just a thing that happens online or offline.
Anand Krishnamoorthy: Anybody heard the term showrooming? You’ve experienced this, I’m sure, but it’s not something as a term you’re familiar with. So let’s define that for you. Showrooming is what we refer to as the free riding of service. That is, you go to a store, Best Buy, most frequently, you experience the product, you talk to the blue shirts to know all about what the product is about, get ideas, and then fire up your smartphone, buy the product from Amazon or some of the low price redone. That’s what is our showrooming.
Anand Krishnamoorthy: In fact, I remember reading a quote from an analyst way back when a stock analyst was covering Best Buy stock that said, he would be having an awesome conversation with his clients, and the minute he would utter the words Best Buy, they will look at their watches and say, “I got to go, time’s up.” Because they thought Best Buy was going to go out of the market in no time. Amazon was eating its lunch. Best buy has been able to survive. Why? We’ll look at in some time.
Anand Krishnamoorthy: But Best Buy faced a significant problem with showrooming, which is, all of us go to Best Buy to experience the product, whether it’s a phone, a computer, audio system, TV and then we shop around. It’s very easy to do with the phones these days and then Best Buy loses a ton of business that way.
Anand Krishnamoorthy: But again, like I said, showrooming is not something that only happens in physical stores. Even online. Some websites spend a lot of effort and money having dedicated support staff that can answer questions before we buy. Some don’t. Okay. So you can do the same thing there. Go to a high end website, get information, and then fall back to a lower type website.
Anand Krishnamoorthy: Why should prices be hidden at all? In general, you would never expect prices to be hidden, because what happens when you hide prices, you have to encounter additional effort in order to find out the price before you buy, because there is no way you’re buying without knowing the price. So consumers incur effort when a price is hidden. What does that do to demand? If prices are hidden, consumers have to work harder to find out price. Anytime you make consumers work harder for something, they will tend to pay less because they’ve incurred additional effort.
Anand Krishnamoorthy: Consumers look at the entire utility, in terms of how much effort they spent searching for the product, how much effort they have to spend getting to your store, how much effort they have to spend checking out, and the price paid. So as long as you force consumers to put more effort into searching for price, the actual price they’ll be willing to pay will be lower. Okay, so keep that in mind. Demand will go down.
Anand Krishnamoorthy: So then, how should things work if one retailer hides price and the other does not? What usually happens is that price competition is less of an issue. Now, what happens is if you hide prices, your prices have to be lower. If someone else reveals prices, those prices have to be higher. So naturally, prices are dispersed so that price competition is lower, works to the benefit of one of the retailers. Which retailer is that? Usually the one that does not force you to put in more effort. Is that a good thing? It depends on who is hiding prices.
Anand Krishnamoorthy: So should a high service retailer, should somebody like Best Buy be hiding prices? Let’s understand what happens when prices are hidden. You know that when you hide prices, the price charge should be actually lower. Does it help? Because best buy is in the business, not just of pricing, but in providing service as well. If you know that your margins are lower, you will put in less effort in terms of service. Your blue shirts will not care as much. When services lower, what happens? You get hurt because your prices are lower. The other retailer can now not free rate as much because you are not putting in enough service effort to begin with. Both of you tend to get hurt.
Anand Krishnamoorthy: Let’s look at the opposite side. Should a low service retailer be hiding prices? What happens when a low service retailer hide prices, the other retailer actually reveals its price. So then the higher price charge and the retailer helps because now higher price, higher margins, you tend to provide more service. Your blue shirts are probably compensated higher, let’s say on commission, or they see more of an incentive. What happens with that result? Both of them benefit. You get higher margins because your prices are higher. There is more free riding benefit because more people will go talk to the blue shirts and move to the other retailer. So both retailers tend to benefit from this.
Anand Krishnamoorthy: It’s actually counter-intuitive because, low prices should actually be revealed because consumers tend to shop more on low prices. But it’s the opposite that we find, which is, these low prices are the ones that should be hidden, not reveal. And why does this work? Because of the showrooming benefits.
Anand Krishnamoorthy: What is the most common response to showrooming? What did Best Buy do to respond to this? Anybody? You’ve all shopped … Yes. Price matching, right? So that is the obvious response at showrooming, that is, if you feel that price is the only reason consumers are jumping ship, take that out of the equation. Match prices, focus on other aspects.
Anand Krishnamoorthy: Should higher service firms, should Best Buy be spending all this effort trying to price match and lower prices? Usually, when you look at work on price delegation, for example, you would never want to let a low priced, low service retailer take leadership of pricing, bad idea. In the case of Best Buy, now you’re providing at high service, you’re training your sales staff, you’re doing all that, you’re encountering so much in terms of expenses, and now you’re charging low prices? The math doesn’t compute, right? So your costs are higher, your prices are lower, how has Best Buy done this?
Anand Krishnamoorthy: If you look carefully at what Best Buy has done, one of the easiest ways this can work is, cost-cutting. If your product costs are higher on this side, bring those costs down. What Best Buy noticed is the biggest wastage in terms of expense for Best Buy is, things getting dropped in the warehouses, TVs tend to fall, break and so on, radios waste is there. Put your blue shirts to greater use, not just upselling and things of that nature.
Anand Krishnamoorthy: But more importantly, Best Buy has benefited from two things that other retailers tend not to benefit from. One, consumers have to walk into your store. The products you sell are such that they have to be experienced before purchase. There is no way you’re buying a TV unless you walk in and look at what kind of image is on the TV, the sound system and so on. The biggest problem for retailers is bringing people in. Best Buy has an easier time with it because all its products have to be experienced before purchase.
Anand Krishnamoorthy: And then Best Buy has had the good fortune of seeing all its direct competitors go up in flames. Circuit City, no more. RadioShack, barely in existence. CompUSA, gone. Tiger Direct. So Best Buy, by some good fortune has had all its competitors go away. So this is not the answer to all your showrooming wars. It has worked for Best Buy because it’s in a business where competition has disappeared in and of itself. Something that does not usually happen in many other instances.
Anand Krishnamoorthy: The last point I want to talk about, which is hidden pricing cues. Let me tell you what list prices then we’ll look at whether that is really true. Most of you, when I tell you the term list price, you think it’s MSRP, right? Manufacturer’s Suggested Retail Price. In fact, all the retailers make it a point to tell us that as well. But is it? Let’s look at this example here from a TV on Amazon. I want you to understand that this kind of work doesn’t just apply to TVs, doesn’t just apply to Amazon. It’s just a good illustration of what goes on. Any retailer, any consumer durable works just as well.
Anand Krishnamoorthy: So if you look carefully, you see that the price being charged at about $698 the list prices $900. Let’s now go to Newegg, another popular retailer, same price almost. What is the list price there?
Speaker 3: 1,300.
Anand Krishnamoorthy: $1,300. How can the list price of an item be so different or two different retailers? Then you go to Samsung, the manufacturer of the TV, there is not even a mention of list price. There’s only one price listed there. So why are retailers playing games with list price when it’s such an important piece of information? Why is list price important? Because it’s the one of the prices that consumers make purchase decisions on. When you look at why you want to buy, one of the biggest arguments is, “How much of a sale there is on the item.” That’s why it’s important.
Anand Krishnamoorthy: So what is the list price? It’s usually one of the three measures of central tendency from grade school math. Which is, it’s the most common price, which is the mode. It could be the median price, the 50% price, or it could be the average price. Turns out, it is none of these. All right. So in practice, none of this is what the list price is. Most of the prices on Amazon are higher than the prices of the same items are competing retailers. So then the bottom line is, nobody has a clue, not even the retailer, about how this list price should be determined.
Anand Krishnamoorthy: Why is that important? Because having a list price drives demand in a number of ways. The higher the list price, the more of a deal you think you’re getting, the more likely you are to buy. List price signals quality. The higher the price of something, you inherently believe that it’s of higher quality, you tend to buy it more. The feeling of getting a deal. One of the biggest reasons for prices to come down is consumers searching. When you see that the gap is high, you know you’re getting a deal, hence you limit your search.
Anand Krishnamoorthy: For a retailer, putting in a fake list price cost next to nothing. You can play games with list price, that probably benefit your sales, but it’s not very expensive to do at all. In fact, we have research that is shown that fake list prices are nearly as effective as genuine list prices. That is, if you put in a wrong … Fake list price, it actually benefits your demand just as much. How much it benefits clearly depends on, how knowledgeable you are as a consumer. We’ll talk about that in a minute or so.
Anand Krishnamoorthy: I want you to carefully look at these examples and tell me whether this helps you make a purchase decision. So in terms of this providing a pricing cue, this TV here is 17% off of list. Something that you might look at when you want to buy. This TV here is 50% off of list. This is a whopping 11 cents off of list, all right. This here is something we observed a lot on Amazon these days, which is, there is no list price at all. How then are you going to know whether you’re playing a deal here? Probably not. This is what has happened on Amazon. If the next time you shop on Amazon, take a closer look. For many of these items, you will not find the list price mentioned. For the majority of items, Amazon has taken away list prices, probably driven by these lawsuits.
Anand Krishnamoorthy: That is, there are so many lawsuits that take retailers to task, California has done that, Canada has done that, which is they believe that these list prices provide no benefit. It only inflates the bill consumers are getting when no sales happen at those prices. In fact, they found that on JC Penny, for example, that the California took apart, all of the list prices were such that not even one sale had happened at those prices. How then is it even a list price?
Anand Krishnamoorthy: But the problem for consumers is, how then are they going to know they’re getting a deal? Absent a pricing cue to compare against, how do you know you’re going to be getting a deal? Are list prices credible? If I tell you that this is 90% off list, does that mean much to you? Some consumers may think it’s a great deal. Others might think you’re just playing games. Who sells for 90% off of list? So again, it depends on how informed you are as a consumer.
Anand Krishnamoorthy: And finally, in the case of Amazon, when might not having this prices actually help? If you are neck deep in an ecosystem, for example, if you’re a prime shopper and the shopped at Amazon, anyway, if you have a ton of Alexa devices at home and the TV you’re buying, is Alexa enabled. So if you are neck deep in an ecosystem, this kind of a gaming really will not hurt you.
Anand Krishnamoorthy: Who might get hurt from this? What will non-prime members do? The ones who lack information, for example, absent of lists price, where might you go? I want you to pay some attention to the New York Times pricing. This is the pricing from a few years ago, but the New York Times first launched its digital offering. So just to explain the pricing here, these are the prices for the d’etre version, that’s the paper version, and these are the prices for the digital or online version.
Anand Krishnamoorthy: So you could get just the New York Times with a phone option for 375, with a tablet for five and digital, all of it for 875 or you could get the paper versions here. Not that … First, let’s understand why pricing is so different, because when you use your phone to read the news, it’s what we call a lean forward experience. That is, you have to put in more effort. It’s not as comfortable. Hence, lower priced. Tablet is more of a lean back experience like approximating reading the newspaper, hence slightly priced higher.
Anand Krishnamoorthy: If you buy any of this, you get all of this for free. That’s how it was … So in other words, if you get any of these, you’ll get all of this for free. So you will then have to be a special breed of stupid, to do this when you can do this and get all of this for free. This is the New York Times, the nation’s most popular newspaper. Only in 2018, did it finally turn the corner and start making money. You wonder why? Because of issues like these.
Anand Krishnamoorthy: But keep in mind, what does this pricing help you do? We are at the point of pricing cues. Although this price be dominated by that, you’re all told in survey design, in questionnaire design. If you have a dominated alternative, take it out, it biases consumers. Does it bias consumers here? What happens is consumers look at this and think this is a better deal. So even consumers that were here, might upgrade to that option.
Anand Krishnamoorthy: So although these prices are biased in some manner, they actually help consumers make up their mind and go to a lower priced option. In the Times case, that is not a smart idea because what you’re doing is you’re essentially moving consumers from a digital option, where cost to serve are so much lower, because in the newspaper business, what is your biggest cost?
Speaker 4: Printing.
Anand Krishnamoorthy: Printing, right? Production costs are almost half of your revenues. So why would you then move consumers from a low cost visual option to a high cost print option, not a smart movement in the case.
Anand Krishnamoorthy: More generally though, how can news even be priced? If you have a hurricane approaching, if you have a school shooting, these are covered in pretty much the same manner at different places. So news is more or less a commodity. But is it though?
Anand Krishnamoorthy: So I usually like to give the example of the precedent and this is going to play down the middle. All right? So it’s not going to lean left or right.
Speaker 5: [inaudible 00:30:40].
Anand Krishnamoorthy: So let’s say President Trump were to walk into the rose garden and look at the sky and say, “Hey, the sky is blue.” One half of the news media, the fair and balanced network will tell you, “Hey, you know what? The sky is bluer than it’s ever been. In fact, when that guy with the funny name was president, the sky wasn’t even blue most of the time.” All right. So that’s one side. What are the liberal media tell you? “You know who else thinks the sky is blue? The Russians, pollution.” So the point is, even something that used to be a commodity, isn’t that anymore. How then should it affect pricing?
Anand Krishnamoorthy: So we always tend to think of price discrimination. That is consumers having different preferences. Even moderates, even Republicans used to read the New York Times, not because of the opinion page, but because of the Sunday crossword, our cooking, what have you. But that is gone these days. If you are a particular kind, if you’re right of center you like they will never sniff the New York Times. In that case, is price discrimination even relevant? Perhaps not.
Anand Krishnamoorthy: I’ll end with the what we usually see as the elephant in the room when we talk about pricing transparency, which is drug pricing. The Trump White House put out a proposal, I think a few months ago. This is very recent, this summer where the proposal was, “If you are a pharmaceutical firm and you’re advertising your drug accompanying that ad should be the list price of that drug.” Much like everything else the White House has tasked, this is also in the courts. It is not going anywhere anytime soon.
Anand Krishnamoorthy: However, let’s see whether this proposal actually helps. How are drug prices set? Do consumers know that? There are layers and layers of middlemen that negotiate to arrive at drug pricing? Consumers have no clue how drug prices are set. So having a list price may not necessarily help them.
Anand Krishnamoorthy: How does the list price of a drug effect what anybody in this room pays for the drug? Nearly everybody has insurance of some kind, a discount plan even if not insurance. So then the list price really doesn’t affect how much you pay. More troubling, try to buy prescription drugs when there is a problem. It’s not like they’re looking to party when you are shopping around for a drug. Who in his right mind actually shops looking for a deal on prescription drugs, right?
Anand Krishnamoorthy: The list price argument works when you’re looking for a deal of some kind. That is the last thing consumers of the silk are trying to do. So if you rule out all obvious explanations, there’s only one explanation that still remains, which is, it is, political. It has nothing to do with what we know in terms of pricing. Election 2020 is nearing. If you ask consumers to list their four most popular enemies, what would they be? Used car salesman, drug manufacturers, insurance providers, big firms, big corporations. So it’s very easy to pick on any of them and make them an enemy.
Anand Krishnamoorthy: Here you’re picking on drug makers to make them the enemy. And the goal is that, if you force these drug makers to put their list prices in an ad, perhaps they’ll be ashamed of the prices they are charging to save lives. That is the goal here. But the point is … Any pharma executives or people in the room? No, right? So let me speak my mind here.
Anand Krishnamoorthy: If big pharma can be shamed into lowering drug prices, that would have happened 30, 40, 50 years ago. The reason drug prices are not going any lower is because, these people cannot be shamed into doing anything. All right. So the point is putting list prices on your ad does next to nothing other than just achieving the political goal. Let’s say you’ve spent all this time and you’ve not listened to much of what I had to say, and you’re thinking, “How best do I apply what we know here in terms of … To your context?”
Anand Krishnamoorthy: First, let’s understand the sad part, which is, when you put on your manager’s hat, you are going to come with a pricing scheme that flies in the face of what your consumers want to do. Consumers and firms can never see eye to eye on pricing. All right, so that’s the challenge. So then, broadly speaking, pricing should hit on four aspects that mean different things to different people in different contexts to different firms. I’ll elaborate that in some time.
Anand Krishnamoorthy: So let’s consider a simple example as we go through this exercise. Let’s say we are considering ticket pricing for the summer Olympics because of winter Olympics, I have no idea about. So the summer Olympics, you know that when it comes to the Olympics, there are many aspects that are different. Not all sports are created equal. There are some sports that are significantly more popular, track and field, the opening and closing ceremonies, gymnastics, swimming, come to mind. Some are much more popular. People will be willing to pay higher prices for those than others.
Anand Krishnamoorthy: As with any sporting event or concert, some seats, courtside seats are much better than nosebleeds, for example. Some stages of these events are so much more interesting than others. Everybody wants to watch the finals, the hits, not so much. How then can you use these different aspects to drive a pricing? Let’s understand what these four terms here mean.
Anand Krishnamoorthy: When you talk about pricing being fair in this context, at least, we are talking about the price that you pay for a given level of quality, that is, what are you willing to pay for this port versus that, and consumers have that in mind as well. There’ll be no fair consumer that tells you, “I want the best for next to nothing.” Consumers are willing to consider quality when it comes to pricing.
Anand Krishnamoorthy: But when it comes to tickets and things like we deal with in this area here, hospitality, allocation is just as important. That is if you have limited seating, you want to ensure that all consumers have at least some shot at getting into the event. Prices have to be affordable. What does that mean? Clearly, it depends on different offerings that you have in mind. So not everybody would be willing to pay the same for a given kind of offering. This is extremely important. That is, you don’t want to put out an offering that nobody cares about and charge less money and call it affordable.
Anand Krishnamoorthy: I’ll give you a couple of examples here. Way back, centuries ago when the railroads began operating, some genius came up with, “Hey, let’s have first-class coaches and third-class coaches.” But then when they thought about it, they had no idea how to differentiate these two, because there were no amenities to speak off their differentiators. So one idea was, “Let’s chop the roof of the first class coaches. So make the third class coaches travel without a roof on their heads.” Again, subject to all kinds of weather problems.
Anand Krishnamoorthy: That is not what we are talking about here when we talk about different offerings. That is, in other words, there is a reason today automakers have backup cameras standard, not just in luxury automobiles, but automobiles across the board. Why? Because you don’t play games with safety in an effort to differentiate on products. So again, this has to be offerings that people care about, not just offerings that nobody cares about.
Anand Krishnamoorthy: When it comes to simple pricing, what did we talk about? You shouldn’t have a math degree to figure out whether it’s a deal. So if you look at a theory alone, it’ll tell you that how hundreds of different types of pricing, where you can clearly break different consumers. It doesn’t work very well. It confuses consumers. So what you would rather do is take away some of this in an effort to keep it simple, clear the confusion.
Anand Krishnamoorthy: And finally, how can pricing be transparent? Let’s look at that issues here. One, price has to be known. More importantly, how you allocate tickets, for example, needs to be clear to everybody. All right. So that’s the second part. And then there’s a reason the Superbowl, the masters, all of them have lotteries for some tickets. It is because of this fairness principle in terms of pricing being transparent. That is, even if you do not receive a ticket to something that’s high demand, you should know someone else who did. You should be able to read about someone in the news getting the tickets, a layman, for example.
Anand Krishnamoorthy: So that is the reason that we have these four principles, that is it can apply differently in different cases for you, but broadly speaking, you have to hit on four of these aspects when it comes to pricing. Believing that leaving some money on the table to eliminate customer confusion may actually be to your benefit.
Anand Krishnamoorthy: Thank you for being here. Thank you.
Paul Jarley: The internet has allowed companies to learn about consumer preferences in ways that just wasn’t possible a few years ago. Back in the day, price-sensitive shoppers revealed themselves by clipping coupons and waiting for the January white sales or the blue light special. Today, companies can offer you a plane ticket without telling you the destination or a hotel room without telling you the hotel. You can get a deal if you don’t care about where you’re going or where you’re staying, and the seller can generate revenue from excess inventory.
Paul Jarley: The internet also gives consumers access to many more choices today on where to buy a product. If you’re a price sensitive consumer, you can search many sites and price compare. You can also go check out the product in the store and then buy it online from someone else. Both sides have more opportunity to learn more and game the other side. In this sense, price games are most certainly a thing.
Paul Jarley: Whenever you’re playing a game, the side that does their homework and has superior information, well, they usually win. The real question is whether you’re willing to take the time to make sure you’re getting the bargain you’re looking for. Rest assured, the retailer, well, they’ve done their homework. What do you think?
Paul Jarley: Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my producer, Josh Miranda, and the whole team at the office of outreach and engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.