And the fair price of the GPS is?

Pricing often generates emotionally charged responses from customers. Customers will look at a price and something tells them whether the price is fair or not. It is very intuitive to assume that customers have a good idea of the fair price of the items of their use. Right?

Let's check out if it is so. To understand customer fairness scale, I carried out a small experiment with my students. I showed them a GPS unit listed on Amazon at $249, and asked them what would be the fair price of this product in India. I told all students that the currency conversion rate is $1 = INR 44.5. I further divided the students into two groups. I showed the first group the prices of Papa John's 12" Large Pizza in Seattle, Washington ($17.99) and in Bangalore (INR 259). The second group was shown the prices of Toyota Corolla in US ($18,000) and India (INR 1,450,000).

The two groups were intentionally anchored with prices of products that have little to do with prices of hi-tech/electronic products. QSR and Auto pricing don't have much to do with electronic product pricing. So logically, the participants will use their fairvalue meter and ideally both groups should give almost similar levels of fairvalue for the GPS unit in question.

Here's what happened. The group that was shown Papa John's prices, the fair value responses were in the range INR 1,000 to INR 8,000, averaging at INR 6,000. The group that was shown Corolla prices, the fair value responses were in the range INR 9,000 to INR 60,000, averaging at INR 20,000. Comparing the averages between the two groups, one group values the same GPS unit more than 3 times the value placed by the other.

The Pizza group was anchored on lower conversion rates in practice, and was shown smaller number (2 and 3 digit numbers). This lowered their reference prices and this group was biased towards the lower side of the scale. The Corolla group was anchored on higher conversion rates in practice, and was shown larger numbers (5 and 7 digit numbers). This raised their reference prices and got them biased towards the higher side of the scale.

When I shared the results of the experiment with the students, they had difficulty believing the fair value estimates of each other, and were fully convinced they had the right estimate. And we are told to believe that customer is ALWAYS right! Really??

Netflix 2011, oh boy!!

Last week Netflix announced it's new pricing structure, and within a day it received 60,000 + negative comments from its fan community on Facebook. That's about 4% of it's fan base. A BOTE calculation, equating every negative comment received within the 24 hours of the announcement with losing 10 subscribers will tell you that about 40% of their business is at stake. Now, that's a lot!!

If you look at the new pricing structure, it is not so bad as it appears. Customers who were subscribing to Netflix for mail-ins and paying the price of the combo deal, now will get a chance to pay just for the mail-ins. Mail-ins business is the real strength of Netflix, and customers anyways didn't like the streamings from Netflix for several reasons. Now they have an option to chose a better streaming service provider and use Netflix just for mail-ins. Certainly not all that bad for the customers. But the value of the pricing structure is lost somewhere, and the company is noticing a strong backlash from the fan community.

Now let's look at Netflix's communication strategy in context of this price change. Netflix is telling the customers that if they opt for both mail-ins and streaming and pay $15.98, it is an increase of about $6 and it is same as the price customers pay for a cup or two of latte. This is where Netflix is missing the point. First of all not every old $9.99 combo customer is going to opt for both mail-ins and streaming; customers will probably stick to Netflix for DVD mail-ins, while many will opt for Amazon or Hulu streaming services. More importantly, that's a pretty lame argument to give to the customers for raising prices. So what if the price increase is same as the price of a cup of latte, what's that got to do with movie rental price.

Netflix had a wonderful opportunity to push a value message to the customers, stating the customer benefits of the new pricing structure. It could have told the customers that now they won't have to pay the combo price if they were only interested in the mail-in rentals. I think customers would have appreciated that thought. Netflix should have kept the combo offer, albeit at a higher price ($11.99 will be the best price for combo), and made the combo offer look attractive given the separate subscriptions costs $7.99 each.

If Netflix decides not to change it's pricing structure, there will be a great case study for me to include in my pricing strategy course outline for next year, on how poor pricing destroys established market leaders!!