Price discrimination (great read!)

Tyler Durden · 17 January 2013

I found this great article from the SMH yesterday and wanted to share it:

Have you heard about the trick they use in fruit shops? If they want to make money from a large load of lettuce they divide it into two. They put half in a ''bargain bin'' and charge something like $3 a kilo. They put the other half at the quality end of the store and charge $6. The well-heeled and uncertain pay $6. Those with less money and keener for value pay $3.

It earns the shop much more than if it had just charged $6 (if mightn't have been able to shift all the lettuce) and much more than if it had just charged $3 (rich folks would have kept the extra $3 in their pockets). It also makes more than if the shop had just charged a single price somewhere in between, such as $4.50. Well-off customers would have still hung on the extra dollars and some needy customers would have still been priced out. The technique is called price discrimination. It may be retail's most clever invention, and it's everywhere.

http://www.smh.com.au/opinion/polit...rmed-and-you-may-pay-less-20130115-2crip.html

Really an eye-opener for me, and in general just makes me think why we as humans like to divide everything into 'classes'.

Thoughts?

tech/a · 17 January 2013

It's a strange twist---human nature.

I've put prices UP on equipment I can't sell and it goes.
We are one of the more expensive in our field and the
HIGHER price projects come our way because clients
Fear loss. If they go with the cheapies what happens if
Something goes wrong or they go broke --- any guarantee
Disappears.

I make sure they question it!

Gringotts Bank · 17 January 2013

Interesting article, thanks.

A heck of a lot of consumers are fooled so easily. If an item is expensive, it must be good. If it's hard to source, it must be good. If it's imported, it must be good. If a celebrity tells me so, it must be good.

I heard a story from a restaurant owner in Melbourne. In the opening 2 weeks he made it so that it was impossible to see from the street how busy it was inside. For the entire week, he told his staff to tell potential customers he was fully booked 2 weeks ahead. Of course they jumped at the opportunity to take a spot for 2 weeks time and told their friends "it was fully booked!!" No customers for two weeks, and a really solid "opening" with people everywhere thereafter. I guess so long as you can back it up with good food... but then again, taste buds can be manipulated it you're tricky enough. Make the plate HUGE and the food tiny - that's a must!

Humans eh? Useless lot!

burglar · 17 January 2013

Tyler Durden said:
... Thoughts?

I had noted that once, different price out front!
I thought the owners were too lazy to put the same price on all the items.

Looking back, I'm glad I didn't buy there!!

pixel · 17 January 2013

Gringotts Bank said:
Interesting article, thanks.

A heck of a lot of consumers are fooled so easily. If an item is expensive, it must be good. If it's hard to source, it must be good. If it's imported, it must be good. If a celebrity tells me so, it must be good.
[...]
Humans eh? Useless lot!

A guy that can hit a golf ball over a paddock gets paid a quarter of a Billion dollars to wear Nike shoes.
Obscene! I'll never buy Nike gear.

Boggo · 17 January 2013

pixel said:
Obscene! I'll never buy Nike gear.

Add another reason...
http://www.abc.net.au/news/2013-01-...ilitary-to-intimidate-factory-workers/4465058

Ijustnewit · 17 January 2013

I have spent allot of my life working in marketing ( retail ) . An extremely successful method is the sending out of Gift Vouchers for a certain dollar value . To use the voucher you must for example spend over $200 on certain product ranges. It's amazing how many people will use those vouchers as they see it as "free money". Thing is that until that voucher arrived they had no intentions of buying anything at all , but they feel the need to use the voucher otherwise they are giving up the "free money". Of course if the voucher was not sent , they would have saved the money spent on something they may have not really needed.

McLovin · 17 January 2013

Price = quality. Generic pharmaceuticals are a great example. They are scientifically the exact same thing and have the exact same effect, infact the government wouldn't allow it to be sold if that wasn't the case but people still buy the more expensive brand name. There's value in a brand! Who knew!!!

Julia · 17 January 2013

McLovin said:
Price = quality. Generic pharmaceuticals are a great example. They are scientifically the exact same thing and have the exact same effect, infact the government wouldn't allow it to be sold if that wasn't the case but people still buy the more expensive brand name. There's value in a brand! Who knew!!!

There have been several examples of the generics not being bioequivalent, certainly some years ago. Hopefully it occurs less often now.
There is also the consideration that some people might consciously choose to pay a bit extra in order to support research based companies. If we only had generic manufacturers, who would outlay the gazillions required to fund ongoing research, I wonder.

McLovin · 17 January 2013

Julia said:
There is also the consideration that some people might consciously choose to pay a bit extra in order to support research based companies. If we only had generic manufacturers, who would outlay the gazillions required to fund ongoing research, I wonder.

Isn't that why they're given patent protection, so they can earn back their investment?

FWIW, the largest single spender in the US of medical R&D is the government through the NIH.

Julia · 17 January 2013

McLovin said:
Isn't that why they're given patent protection, so they can earn back their investment?

FWIW, the largest single spender in the US of medical R&D is the government through the NIH.

That might cover their investment in that drug. It doesn't cover their investment in the hundreds of others they work on that never make it to the market.

McLovin · 17 January 2013

Julia said:
That might cover their investment in that drug. It doesn't cover their investment in the hundreds of others they work on that never make it to the market.

Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.

One of the reasons I'm so anti resource stocks is that they spend years finding and developing these mines and then can only accept a commodity price once they finally have mined their product.

FlyingFox · 17 January 2013

Julia said:
There have been several examples of the generics not being bioequivalent, certainly some years ago. Hopefully it occurs less often now.
.....

I think they are getting much stricter on this. However it is possible that drugs are not bioequivalent because the exact manufacturing procedure was not followed and you get different isomers etc.

FlyingFox · 17 January 2013

McLovin said:
Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to what Apple or Intel does.

Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery. To give you an example, in the last five years the big pharma have been developing quite a few drugs for Alzheimer's disease, a handful of which have made it to last stage clinical trails. So far non of them have passed the clinical trials and would have cost those companies up to a billion dollars maybe more. I forgot numbers but I think to get a drug to stage 3 clinical trial is something in the order of a 100-500 million. To market is over 1 billion.

In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.

McLovin · 17 January 2013

FlyingFox said:
Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery.

...

In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.

I'm not disputing that at all. I'm saying they calculate IRR on total R&D spend, not on R&D spent on successes. In that sense they are no different to any other company that needs to earn back its cost of capital.

FlyingFox · 17 January 2013

McLovin said:
I'm not disputing that at all. I'm saying they calculate IRR on total R&D spend, not on R&D spent on successes. In that sense they are no different to any other company that needs to earn back its cost of capital.

Agreed.

pixel · 17 January 2013

McLovin said:
Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.

One of the reasons I'm so anti resource stocks is that they spend years finding and developing these mines and then can only accept a commodity price once they finally have mined their product.

I "get" and agree with your first paragraph, McLovin;

but what do you mean by "anti resource stocks"?
You're not advocating to "leave it in the ground", are you?
Maybe you're reluctant to buy/ trade them because of the high risk of failure?

If the latter, I'd contend that - unlike a Pharma company - a mining (incl oil) explorer will have a fair idea of the product's price, even accounting for some variation into the future. Once they have shore up a JORC resource and draft a PFS, DFS, BFS, they'll have a fair idea of (1) what's in the ground, (2) how much it'll cost to get it out, and (3) what they can sell it for.
I do agree though that many a gamble is taken on hope and those hopes are dashed when they find nothing is there or someone else has beaten them to the punch. Look no further than AXE's graphite trumped by SYR.

burglar · 17 January 2013

pixel said:
I "get" and agree with your first paragraph, McLovin;

but what do you mean by "anti resource stocks"?
You're not advocating to "leave it in the ground", are you?
Maybe you're reluctant to buy/ trade them because of the high risk of failure?

If the latter, I'd contend that - unlike a Pharma company - a mining (incl oil) explorer will have a fair idea of the product's price, even accounting for some variation into the future. Once they have shore up a JORC resource and draft a PFS, DFS, BFS, they'll have a fair idea of (1) what's in the ground, (2) how much it'll cost to get it out, and (3) what they can sell it for.
I do agree though that many a gamble is taken on hope and those hopes are dashed when they find nothing is there or someone else has beaten them to the punch. Look no further than AXE's graphite trumped by SYR.

AXE has stuff other than Graphite, (though 1 poster has said it's crap)

McLovin · 17 January 2013

pixel said:
but what do you mean by "anti resource stocks"?

As an investment they're not for me. If someone wants to dig 'em up, I don't mind.

pixel said:
If the latter, I'd contend that - unlike a Pharma company - a mining (incl oil) explorer will have a fair idea of the product's price, even accounting for some variation into the future. Once they have shore up a JORC resource and draft a PFS, DFS, BFS, they'll have a fair idea of (1) what's in the ground, (2) how much it'll cost to get it out, and (3) what they can sell it for.

Let's assume they know what 1 and 2 will be, how will they know what 3 will be before the mine is even built?

Shareholders will wear any failures for any commodity business because the market won't pay a cent more than it has to. If the cost of extraction blows out they have to grin and bear it. If the market price falls below their cost of production, too bad. By contrast, and within reason, a pharma company can pass on the costs to the end user as higher prices and they can set the price.

DocK · 17 January 2013

pixel said:
A guy that can hit a golf ball over a paddock gets paid a quarter of a Billion dollars to wear Nike shoes.
Obscene! I'll never buy Nike gear.

Price discrimination (great read!)

Tyler Durden

tech/a

No Ordinary Duck

Gringotts Bank

burglar

pixel

DIY Trader

Boggo

Ijustnewit

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In Memoriam

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Julia

In Memoriam

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FlyingFox

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McLovin

FlyingFox

pixel

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