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Price Discrimination or Price Promotion?

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16th Aug 2004
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The media has highlighted on several occasions the propensity for companies to offer potentially new customers better deals than their existing ones. There’s often a balancing trick that needs to be done or at least considered. If you are to offer a particular price deal to one segment of the market and not to the others, you could end up alienating one or more types of customer. No matter which category you place them (new, prospective or existing), they could feel rather hard done by and cheated out of a decent deal.

Those who espouse Customer Relationship Management, often forget that marketing itself and not simply technology is the key factor that either helps you to create long-lasting relationships with customers or not at all. Price and the way in which you communicate the promotional activity will therefore ultimately have a positive or negative impact on the customers’ experience and your relationship with them. Please also see: ‘Legal, decent, honest and truthful. Are you sure?’ by the Institute of Direct Marketing. This whitepaper is not a reflection upon the reputations of anyone, or their companies, participating in this editorial.

The driver behind many CRM projects is the perceived need to cut costs by creating a single view of each individual, focusing on existing customers perhaps at the expense of new ones, and sometimes the need to rationalise the expense of managing the relationship leads to customers being pushed down a particular channel. Yet pricing strategies can turn this assumption, the focus upon an existing customer base, on its head.

Quite often while out shopping I pass a Telewest representative, promoting cut-priced deals on Blueyonder broadband connectivity, and on one or two occasions I’ve commented that I wish the company could offer existing customers the same deal. It seems unfair to pay £27.99, while seeing shopping mall kiosks advertising lower price deals at £17.99. To the unacquainted at first glance, to the existing customer at least, it seems that he is no longer getting a fair deal. However, the company says that the latter is an introductory offer, running at a slower bandwidth rate and some existing customers (something I wasn’t aware of) have been offered an increase in their bandwidth from 512Kb to 750Kb.

Customers are very sensitive creatures and many of them may not have the time to find out why one price deal is better than another. So it is a marketer’s job to make sure the reasons or options for offering a deal are clear, and that any price promotion does not ‘discriminate’ against one particular segment without a clear rationale behind it or them. There is an argument that if such low prices can be offered to prospective customers, then where is the extra cost or more specifically why can’t this be offered to existing ones? Don’t they deserve being rewarded for their loyalty?

Chad Raube, director of product strategy at Telewest Broadband says, “The current broadband market in the UK is one of the most competitive Internet markets in the world. Leading ISPs such as Blueyonder have to maintain aggressive and innovative marketing tactics to stay ahead of the game. We never aim to discriminate against existing customers, but discounts and offers to attract new subscribers need to stand out from competitors and offer a compelling reason for someone to choose us over the many companies reselling BT's ADSL service. Many of our discounted offers are available to both new and existing customers and we firmly believe that keeping existing customers happy is just as important as attracting new ones. At the moment that approach is working well, with around 70% of broadband users within our franchise areas taking Blueyonder services at home.”

With regards to existing customers, he adds: “Many of our offers are available to existing customers. Of course some discounts aren't applicable to existing customers by their nature. For example, we currently offer new customers free installation, which isn't something that is transferable to a customer who already has all three of our services installed. Existing customers with only one or two of our services can still benefit from the offer, however, by choosing to have further services installed for free.”

Stephan A. Butscher, a partner of Simon - Kucher & Partners and leading figure on pricing strategies, believes that price differentiation is quite important. He comments about services like those offered by Telewest and its ISP, Blueyonder, “One could also argue that existing customers agreed to, say, one year contract knowing they would be excluded from future promotions during that time. But, after that period is over, they should be allowed to migrate to possibly an existing better rate. So my opinion is differentiate; find out what different segments want, design offers around that with the right fences.”

Butscher elaborates: “One of the biggest profit sources for companies lies in efficient market segmentation and consequently price/product differentiation. With only one price in the market the full value of an offering cannot be fully extracted. Thus different segments should be offered different prices for, and this is important to avoid perceived discrimination, variations of the core product. Clearly communicated and well fenced-off alternative offers encourage customers to self-select, which offer they perceive to be the best for them. To create the necessary fences many differentiating dimensions are available, including bundling in (or excluding) additional hardware, services or soft benefits.”

He believes my next example, Chessington World of Adventures, is more about bad communication of a promotion than price discrimination. On Saturday 7th August 2004 I saw a TV advertisement flash passed my eyes, offering £15 entry to the theme park but I hadn’t realised (and being nowhere near a PC with a connection to the internet) that I could only get the offer if I printed off some vouchers at chessingtonsummersale.co.uk. That was the last time I saw the advert, and the only reason why my girlfriend and I planned to visit the park. So off we went the following day, arrived and asked about the promotion only to be told that the full fare of £27 is applicable because I hadn’t gone to an Internet Café (I was away from my office) to print off the vouchers.

So what’s the problem? Does this amount to price discrimination by the channel of delivery? It certainly spoilt my adventure, and I would have preferred to revert to my childhood memories of Chessington Zoo. For me the problem was that I saw no difference, and asked how much more it would cost the Tussauds Group to offer the same promotional deal to customers who either do not have access to the internet, or simply came without realising that the deal was off unless they went to the new website.

Furthermore, although the company claims that its pricing structure is clear on all of its websites, there is no mention of the new promotion of its related website on the main site – chessington.co.uk. If you click on the latest news and offers button it simply brings up a response form, which I’d suggest is not what a customer actually wants to see. I’ve checked the site several times. There’s also a rather annoying Flash home page, click on skip and either doesn’t work or takes its time to click through to the next page.

The park’s press officer, Celine Gordine-Wright, claims that the pricing strategy has nothing to do with channels or customer status. She also says, “As with many marketing campaigns there will always be some consumers that get exposed to certain messages whilst others don't, this is the way of marketing communications and limited budgets.” So why is the offer only available on the web? “54% of the UK has daily access to the web, this is therefore the most open way of offering a consumer deals rather than relying solely on let’s say The Sun on it's own. This will only cover 5.5% of the UK. As such, this is a summer promotion clearly communicated in TV & Radio as only being available via the voucher from the web.”

“Additionally”, she adds, “The offer has also been communicated via a door-drop circulated to 3.6million households in the area.” Clearly though this isn’t enough. I very much doubt that every householder has received a flyer on his or her doorstep. I know that I haven’t received one, and I checked their main website (which I had looked at earlier in the week before I saw the TV advert) again but found nothing about the deal. Yet I later, though it was too late as we’d already been to the park, discovered a link on lastminute.com.

It seems to me that many customers could find their day out spoilt, fall into the same price chasm due to either poor communication or the offer not being available throughout the channels. To be fair, Gordine-Wright concludes: “We believe that our pricing policy is indeed fair and in fact 87% leave the park stating that they view the day as having been value for money." Please see ‘Added Value - Price Relationship’ by The Sales And Marketing Consulting Group.

The offer, in my view, should be communicated throughout the channels to avoid alienating potential customers, or upsetting the customers’ experience when they get to the park without realising they’ve got to connect to a website. The park could also offer an all-in-one pricing scheme; better value in my mind. Once you’re in the park there’s more to pay, and that’s not just for drinks and food. Not all of the rides are included in the ticket price, and although it was a fun day out for my girlfriend’s 3-year old daughter, the park’s Adventurers – its customers, could easily blow £200 in a day. Personally, I think a more traditional fun fayre is more enjoyable at a better price.

Some may think that I must be against segmentation. That’s not the point of this article and not what I am arguing. You should certainly offer different types of customers, which you will as a matter of course segment quite logically, what they want. However, any type of promotion must be perceived to be fair to all segments of the market and the offer should be communicated effectively and perhaps be made available across the channels. Remember that customers are very happy to go elsewhere, and even never return, if you don’t treat them with care. Differentiate, if you need to, but make sure that your promotional activities are done with a degree of sensitivity. Pricing and promotions are just another aspect of true CRM, so get it right!

Don't lurk.... we welcome your comments. Make them below or email me at [email protected]

By Graham Jarvis
[email protected]
13th August 2004

Recommended Further Reading

 

  1. ‘Legal, decent, honest and truthful. Are you sure?’ - Institute of Direct Marketing
  2. Added Value - Price Relationship - The Sales And Marketing Consulting Group
  3. Prices under pressure in Europe – but not in the UK - Hans Martens, Martens Int. Consulting
  4. A wholehearted approach to business growth
  5. Internet Advertising and Consumer Price Searching Behaviour - This paper is part of the International Journal of e-Business Strategy Management published by Winthrop Publications Ltd.
  6. Price Competition and Uncertainty in Retail E-commerce – Will the Web Lower Retail Prices? - The International Journal of e-Business Strategy Management published by Winthrop Publications Ltd.
  7. So, What’s Wrong With The Concept Of Loyalty Pricing in Banking? - Ralph Harrison
  8. Riversand Technologies Inc

     

Replies (4)

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By admin
19th Aug 2004 15:50

By offering increasingly attractive recruitment incentives marketers are educating customers to defect.

i) Financial Services - credit card introductory rates
„0% interest on balance transfers for 6 months“, you can hardly open a magazine; walk down the street; watch TV; or even answer the phone without seeing/hearing these words. The plethora of FS companies offering credit cards all seem to have adopted this as a base incentive to lure customers, and if your principal KPI is number of card holders then why not?
There is now a generation of Britons who every 6 months are looking for a new credit card to move their credit balance to, and there are no shortage of offers. Even to the extent that you can move an interest paying balance from one account to an interest free introductory offer within the same organisation. They are cannabilising their own business!
And the barriers to moving balances are very low: „preapproved credit limit“, „one minute approval on-line“ and more overused phrases encourage customers to take up these offers. So what is the benefit of remaining loyal to one card provider? Do I feel that I gain anything from our long term relationship, that my loyalty is rewarded? Does my credit card provider learn about me and distinguish the service it offers me? The answers None, No and No will come up more and more, and the complaint that the undifferentiated service that I am given, has now been superceded by a new introductory offer available to new customers. Now do I feel like a valued customer? Or do I feel like I would rather take the next introductory offer from anyone but my existing provider?

Thanks (0)
avatar
By admin
19th Aug 2004 15:50

By offering increasingly attractive recruitment incentives marketers are educating customers to defect.

i) Financial Services - credit card introductory rates
„0% interest on balance transfers for 6 months“, you can hardly open a magazine; walk down the street; watch TV; or even answer the phone without seeing/hearing these words. The plethora of FS companies offering credit cards all seem to have adopted this as a base incentive to lure customers, and if your principal KPI is number of card holders then why not?
There is now a generation of Britons who every 6 months are looking for a new credit card to move their credit balance to, and there are no shortage of offers. Even to the extent that you can move an interest paying balance from one account to an interest free introductory offer within the same organisation. They are cannabilising their own business!
And the barriers to moving balances are very low: „preapproved credit limit“, „one minute approval on-line“ and more overused phrases encourage customers to take up these offers. So what is the benefit of remaining loyal to one card provider? Do I feel that I gain anything from our long term relationship, that my loyalty is rewarded? Does my credit card provider learn about me and distinguish the service it offers me? The answers None, No and No will come up more and more, and the complaint that the undifferentiated service that I am given, has now been superceded by a new introductory offer available to new customers. Now do I feel like a valued customer? Or do I feel like I would rather take the next introductory offer from anyone but my existing provider?

Thanks (0)
avatar
By admin
19th Aug 2004 15:50

ii) Mobile telecoms - subsidised handsets and tariffs
With the introduction of Mobile Number Portability, it is a wonder that anyone stays with the same mobile telco for longer than the duration of their contract. From experience I know that a new handset which was being offered to new customers for free would have cost me GBP129 when I wanted to renew my contract (after five years of loyal, if not satisfied, custom). So did I grin and bear it in the hope that one day my loyalty would be recognised and rewarded? I’m sorry, but I didn’t. (actually I’m not sorry). And not only did I get the handset for free, but I also got three months line rental free, so by jumping ship I saved GBP189 versus staying put.
Furthermore an acquaintance of mine had been a loyal customer of a mobile telco for 4 years (of which 3 years she was out of contract). After 4 years her handset gave out, not entirely surprisingly. When she asked about her options instead of saying that they would provide her with a low spec handset for free or a high spec handset if she renewed her contract, they said, there was nothing they could do for her unless she committed to another contract. Bear in mind that if she had defected at any point in the last 3 years she would not be in this predicament. So now she is left without a handset to make use of the one months termination period that she has to see out.

Now I see why churn rates are so high, because customers are rewarded for churning and punished for remaininng loyal.

What is needed? A better allocation of marketing spend between acquisition and retention. I don’t expect (and honestly don’t want) christmas presents from my telco to thank me for being a good customer, but I would like to think that I am least being treated as well as any new (or non) customer.

Thanks (0)
avatar
By admin
19th Aug 2004 15:50

ii) Mobile telecoms - subsidised handsets and tariffs
With the introduction of Mobile Number Portability, it is a wonder that anyone stays with the same mobile telco for longer than the duration of their contract. From experience I know that a new handset which was being offered to new customers for free would have cost me GBP129 when I wanted to renew my contract (after five years of loyal, if not satisfied, custom). So did I grin and bear it in the hope that one day my loyalty would be recognised and rewarded? I’m sorry, but I didn’t. (actually I’m not sorry). And not only did I get the handset for free, but I also got three months line rental free, so by jumping ship I saved GBP189 versus staying put.
Furthermore an acquaintance of mine had been a loyal customer of a mobile telco for 4 years (of which 3 years she was out of contract). After 4 years her handset gave out, not entirely surprisingly. When she asked about her options instead of saying that they would provide her with a low spec handset for free or a high spec handset if she renewed her contract, they said, there was nothing they could do for her unless she committed to another contract. Bear in mind that if she had defected at any point in the last 3 years she would not be in this predicament. So now she is left without a handset to make use of the one months termination period that she has to see out.

Now I see why churn rates are so high, because customers are rewarded for churning and punished for remaininng loyal.

What is needed? A better allocation of marketing spend between acquisition and retention. I don’t expect (and honestly don’t want) christmas presents from my telco to thank me for being a good customer, but I would like to think that I am least being treated as well as any new (or non) customer.

Thanks (0)