The virtue of price discrimination

The virtue of price discrimination(keithschacht.com)

15 points by rishi 14 years ago | 15 comments

ctdonath 14 years ago |

I recall Bauch & Lomb (sp?) doing something like this with contact lenses: three prices were offered for three different packagings ... and the general public was outraged when it was discovered the content of those packages were exactly the same. Dell got beat up for something similar, offering different prices depending on how you navigated thru the website to a given product's page.

Price discrimination has its place, and if not handled with care those paying more because it's worth more to them will resent the treatment.

lubujackson 14 years ago |

These are two different things. Pricing in Farmville is incremental pricing, where you get incrementally more for more $. Price discrimination is charging different people different amounts, like charging people to read an article on their Kindle that they can read for free through their browser, etc. That being said, much, much, MUCH more complicating pricing is possible thanks to the Internet, and companies are just starting to explore the possibilities. A really good example (that is positive for end users) is how Steam does deep discounts and bundles all the time. As a user you grow to expect these price fluctuations for games, but most industries haven't been so affected yet.

Splines 14 years ago |

It angers me to see this same logic applied to video games. From a business perspective it might make sense, but playing a video game that functions this way (like FarmVille et al), leaves a sour taste in my mouth.

I've tried a few of them, universally dislike the idea, and have yet to pay for any.

If a game offers IAP, I look to see if it's some sort of virtual currency. If it is, the developers go on my shitlist and I try to never give them my business again.

I've seen developers publish awesome fun games with little to no DLC, and it saddens me when I see their next release to turn out to be a farmville-ish rehash.

gte910h 14 years ago | |

There is plenty of IAP currency that is far far far from farmvilles "annoy you to death if you don't pay" idea.

For instance, look at League of Legends as an example of a far more positive type of currency:

You can unlock new characters by playing, or more quickly by by paying. You can unlock cosmetic skins purely by paying. You can temporarily enhance the speed at which you unlock players by paying.

You can never play a dollar and play at the top level of the game.

Some people certainly pay hundreds of dollars to play the game, but many pay $0. Many people who are busy pay some money and then are able to gather the characters that time rich and cash poor players then spend their time to achieve.

As to more generic DLC that isn't currency based (A la Mass Effect), I love that stuff. Video games have cost $40-60 bucks for all time. They cost that in 1981, and they cost that in 2011. By putting DLC in, they can not raise that price yet actually make more money only off the people who really like the game and wish to go deep into it.

For instance, I have bought the DLC for Oblivion, as I loved that game (it added about 20 hours of quests in another world). However, I've largely avoided the DLC in lots of other games that I've bought the other game. Therefore, I pay more for games I enjoy more, and pay less for games I enjoy less. Sounds like perfection in pricing to me.

Many people who don't like the more normal type of DLC wouldn't like the game costing $15 bucks more either. But that's the alternative really, or scaling back the base game.

Splines 14 years ago | | |

Don't get me wrong, I do love DLC that adds to the game world and extends the life of the game. I've bought DLC like this in the past, except they were called "expansion packs".

Having never played LoL I can't really say one way or another if I agree with their approach. As long as it's possible to play the game without restriction, I'm usually ok with it. What bothers me is the "You've run out of energy, pay $X to continue playing" business model.

Cosmetics, even cheats are fine by me.

It's troubling that what I find abhorrent in game design is succeeding in the marketplace. All the best to the guys doing well, I certainly don't begrudge their success [1], except that I will personally take no part in it.

[1] ok, maybe a teeny bit, but what I say isn't going to affect their bottom line

Lazare 14 years ago |

Back in the day, we sometimes called this "shareware". The first episode of Commander Keen was free, but episodes two and three cost money. :)

Or we called it a free trial, or a demo. We included a disc with a crippled version of the game in a video card box, or we glued it to the cover of a gaming magazine. Or we called the extra parts expansion packs. Or sequels. Or DLC. Or, yes, we sell them for real currency in an in-game item store as with Farmville (or League of Legends, World of Tanks, Gunbound, etc.)

All of it boils down to the same thing: Some people pay nothing and consume some amount of free content. Other people pay $X and get some higher amount of content, even while other people pay a higher $Y and get even more content. And still others will pay less, and get the same content, because they waited for a Steam sale.

And so it goes. Pick any six gamers at random who own Portal, and they all probably paid different amounts for it: Some bought it as part of the Orange Box, some individually, some got it for free, some bought it in a store, some got it for free when they bought Portal 2, some bought it on sale, some bought it after the price was cut, some bought it in the US, some bought it in various other countries, some bought it using USD, some bought it using a different currency. There's probably 500 different prices you could have paid for Portal. (Actually a lot more, once you include exchange rate fluctuations for people buying Steam games in USD using a non-USD currency.)

And you know what? Meh. There's not a lot new under the sun. (Especially when it comes to ways of relieving punters from their cash.)

kaonashi 14 years ago |

Things like this invariable involve artificially crippling a product in order to create a market segmentation that does not naturally exist. I have a hard time coming to terms with the virtue of this model.

chc 14 years ago | |

Asking people for money before you'll give them the product creates market segmentation that does not naturally exist. There's no such thing as a "natural" pricing structure. I hope we can agree that, in pricing a product, your goal is to offer a fair exchange of value. Since different customers value things differently (for example, a billion-dollar business stands to gain a lot more from a 1% increase in revenue than I do), tiered pricing suits this goal more naturally than flat pricing.

jessriedel 14 years ago |

Incidentally, better price discrimination transfers some of the surplus generated by economic exchange from the consumer to the producer. Depending on the situation, this may or may not be a societal good.

hammock 14 years ago |

It would serve the OP well to gain an understanding of the difference between first-, second-, and third-degree price discrimination. http://en.wikipedia.org/wiki/Price_discrimination#Types_of_p...

JoeAltmaier 14 years ago |

I can't help but think of this as preying on the weak. Who pays 1000's per month? Somebody with a broken sense of value. This is not a business model I want to participate in at any level.

chc 14 years ago | |

I'll assume you're talking strictly about leisure activities, since obviously there are business services worth way more than that.

You might be right about some cases, but I think you're painting with too broad a brush. Some people just have more money than things to do with it. If I have thousands of dollars in spending cash every month, what's necessarily "weak" about spending that much on stuff I want in a game? I do think it would be more admirable to donate the money to charity or something, but if you're spending it on frivolity, I don't see what's wrong with spending thousands in one place rather than lots of different places. Do you feel the same way about other expensive items, like cars and plane tickets and high fashion? (I really do know a guy who buys cars in much the same way that people buy virtual hats.)

I once dated a girl who was shocked that I would rather spend $20 more to get something than drive an extra half an hour. I wouldn't have gotten paid for that half an hour, so it's not like I actually made money by not doing it — I simply valued that slice of my life more than $20 minus the cost of gas. I don't think that's necessarily a broken value system. $20 wasn't worth as much to me as it was to her.

JoeAltmaier 14 years ago | | |

I'm sure there are folks like those you describe. There are also many addictive personalities in the world, spending the grocery money on a farmville threshing machine.

I aslso suspect Zinga isn't at all concerned with the difference, makes no effort to distinguish, and for the larger part is preying on the sick and weak.