Pricing Perils…

I have been following the news about pricing change that was done by Netflix – like Google, Amazon and Apple – a pioneer, albeit in a different business area. Their business-approach to video rental services embraced technology better than their competitors. They were also good at Marketing. They provided both encrypted video streaming service, as well as, mail-delivered DVD service.

Recently, probably because they wanted to get over costs or because they wanted to spin-off their DVD business (the spin-off is called “Qwikster”!), they played around with their pricing. Until recently, what was priced at $9.99 ($7.99 for unlimited streaming + $2 for DVD rental) started costing 60% more when they announced that DVD rental will also cost an additional $7.99.

The resentment to this pricing change has seen angry subscribers on social networks, negative blogs by opinion-makers etc. leading to stock price fall. This even prompted their CEO to reach out with an apology – which has evoked “mixed reactions”.

This led me to reminisce on some pricing decisions I have seen in my career and personal life…

Early nineties – I worked with a company which was amongst 21 licensees of the same C-DOT technology, selling to one single customer – the Department of Telecommunications. After initial years of quota-based buying from each licensee, DoT suddenly went for a competitive bid. The least-priced bidder would get 50% of that year’s order. All other bidders who agree to deliver at the same price as the L1 would be given a quota of the remaining 50%. This is an example of buyer playing around with the pricing model.

Although the licensees tried to form a cartel, to bid within 2% of a standard band of prices, the attraction of the 50% order made one of the licensees quote an unusually low price. The bottom fell out and many of the licensees went out of business; including some by reputed business-houses.

Late Nineties – I worked for a metro-license GSM operator (in a duopoly business model). In one of the first price-wars in telecom services in the country, we launched a “Count-down” plan. Those days, the average duration of a call was 30 seconds and would cost Rs.5/- to Rs.6/- including PSTN charges. We figured out that the longer the duration of calls, the more the money. So we came up with this plan – the first 10 sec. unit was priced at Rs.2/-, the next at Re.1/- and Rs.0.50 for every unit thereafter – for both prepaid and postpaid.

We got what we wished for – the plan worked; only too well. While call durations went up, the holding time of PSTN circuits also went up. This meant that some callers would not be able to complete their calls and the overall experience of network usage would worsen – a big danger in a duopoly as churning subscribers know exactly which other network to go to. Unfortunately, the business plan for upgrading the network was unviable with prevailing costs of connectivity and equipment. We had to push-up the prices, which made three users to go to court (we got off easy, though). This is an example of a seller playing around with pricing.

In the unorganized sector – When I was a kid, we always needed the services of a plumber or a carpenter for maintaining our house. I remember two carpenters that my dad used to hire. One was a 30-year old, spoke some English, had a shop, came on a scooter and appeared neat. The other was an old man, used to hang out at a street corner awaiting daily jobs, had a dilapidated bicycle and appeared dirty. I also remember that the old man was always grouchy.

As kids, we preferred the younger guy over the older guy – but the fact that these two were in competition for my father’s business meant they were comparable! Why was that? I now recollect a few conversations that I have overheard which provide some clues.

The older man cost much less – he only wanted enough money for his booze and food. The younger man would keep raising his fees now-and-then citing cost of living, his children’s education, the overhead of his shops etc. Perhaps, there was nothing to choose based on quality of their work – though I suspect that the old man was better. This is an example of frequent price escalation.

Moral of the story:I suppose, it is tougher to manage a positive response to pricing change; tougher than coming up with the actual number that we call price.

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