When he sells Appointment Reminder, he encourages people to pick a tier based on the cost of one missed appointment rather than based on their particular needs (i.e. the cost of serving them).
It’s insanity to ever ask a buyer to value a product based on your cost; that’s like an elementary principle of business. But there is a difference in cost, in that in the article you linked, the author talked about 25 extra hours of work he put in just to land that enterprise deal. That is a different cost of the offering, and has to be priced in.
if we use the ‘capture as much consumer surplus as possible’ definition, both of those are clearly serving the same general function.
There are LOTS of ways to “capture as much consumer surplus as possible”. Marketing and sales, for example, are the process of communicating the benefits of your product to a customer in such a way as to make them willing to pay more—thereby capturing more of their surplus.
Well-run business are always trying to capture as much consumer surplus as possible, so that’s not a differentiating factor for what makes something price discrimination, IMO. The portion of consumer surplus a business captures is called profit, so if you’re not trying to capture as much of it as you can, you’re probably doing something wrong. ;-)
I think this is symmetric, though. The ‘added value’ of paying the non-coupon price is that you get the time you would have spent managing coupons and to conspicuously consume non-coupons; the ‘added value’ of paying the enterprise price is often just the conspicuous consumption of non-hobbyism. But if I want coupons to represent price discrimination, then it makes sense to see the enterprise tier as also price discrimination.
The difference is that in the case of the coupons and most other discounted offers, the differentiation is acheived by making a worse product: a factory second, something you have to take more time for, stay over Saturday for, etc.
I think what I’m trying to say is that if your higher-priced customers are trying to bypass your tiering to pay a lower price, then you have price discrimination. If your higher-priced customers are happy to pay more, you have product differentiation. This isn’t a perfect bright line, because some customers will always want the better deal. But a good question to differentiate is whether you created your new product by tacking conditions, restrictions, and other annoyances onto a perfectly good product to keep your higher-end people from wanting it, or whether you added premium features onto an existing product to capture people with lower price sensitivity or greater desire to signal their consumption. The latter IMO is product differentiation, the former price discrimination.
There’s also an important point you’re missing about “enterprise” deals. Yes, enterprises do engage in a certain amount of conspicuous consumption… though it’s usually at the multi-milion dollar level. (As the linked article points out, $5K is just a rounding error for an enterprise.) And yes, enterprises can overspend due to it not being the decision maker’s money.
BUT… there is a good reason for that. An enterprise values stability over optimum performance, because it relies on lots and lots of mediocre people rather than a few talented ones. The public enterprise’s “real” product in some sense is an attractive investment for institutional investors, and that requires actions and systems that look stupid on the surface to people who don’t have their money invested in the business (as opposed to say, their time).
It helps to realize that an enterprise is not about making the most money, but making its bosses happy… and the real bosses are the investors, who want their investment to be safe as much as they want it to perform. The downside risk of a bad purchasing choice for a large organization can be immense compared to the upside benefit of the best possible choice. That’s why they do what they do, and it’s ultimately the investors who are paying for that extra insurance.
Is there waste? Sure. But it’s a form of insurance, which is also waste if you never actually need it. The thing is, you don’t know (institutionally) whether you’re gong to need it, so it’s a bad idea to take the risk. Especially since none of the people actually working in the organization get to partake of the upside of a good decision, but will personally be penalized for the bad decision. These factors have zip-all to do with conspicuous consumption. Plenty of employees within a company will happily pay the hobbyist price, but are bound by policies that e.g. require support or SLAs for all software purchases, etc. Or else they have requirements like auditing or whatever it is that trips the “enterprise” flag.
IME, you have to get up to a somewhat higher level of management to have conspicuous consumption as part of turf wars or signaling personal importance, and you’re talking six/seven/eight figure deals there, not four or five. The closer you get to the trenches, the less people care about signaling to other managers vs. getting something to help get themselves through the day.
It’s insanity to ever ask a buyer to value a product based on your cost; that’s like an elementary principle of business. But there is a difference in cost, in that in the article you linked, the author talked about 25 extra hours of work he put in just to land that enterprise deal. That is a different cost of the offering, and has to be priced in.
There are LOTS of ways to “capture as much consumer surplus as possible”. Marketing and sales, for example, are the process of communicating the benefits of your product to a customer in such a way as to make them willing to pay more—thereby capturing more of their surplus.
Well-run business are always trying to capture as much consumer surplus as possible, so that’s not a differentiating factor for what makes something price discrimination, IMO. The portion of consumer surplus a business captures is called profit, so if you’re not trying to capture as much of it as you can, you’re probably doing something wrong. ;-)
The difference is that in the case of the coupons and most other discounted offers, the differentiation is acheived by making a worse product: a factory second, something you have to take more time for, stay over Saturday for, etc.
I think what I’m trying to say is that if your higher-priced customers are trying to bypass your tiering to pay a lower price, then you have price discrimination. If your higher-priced customers are happy to pay more, you have product differentiation. This isn’t a perfect bright line, because some customers will always want the better deal. But a good question to differentiate is whether you created your new product by tacking conditions, restrictions, and other annoyances onto a perfectly good product to keep your higher-end people from wanting it, or whether you added premium features onto an existing product to capture people with lower price sensitivity or greater desire to signal their consumption. The latter IMO is product differentiation, the former price discrimination.
There’s also an important point you’re missing about “enterprise” deals. Yes, enterprises do engage in a certain amount of conspicuous consumption… though it’s usually at the multi-milion dollar level. (As the linked article points out, $5K is just a rounding error for an enterprise.) And yes, enterprises can overspend due to it not being the decision maker’s money.
BUT… there is a good reason for that. An enterprise values stability over optimum performance, because it relies on lots and lots of mediocre people rather than a few talented ones. The public enterprise’s “real” product in some sense is an attractive investment for institutional investors, and that requires actions and systems that look stupid on the surface to people who don’t have their money invested in the business (as opposed to say, their time).
It helps to realize that an enterprise is not about making the most money, but making its bosses happy… and the real bosses are the investors, who want their investment to be safe as much as they want it to perform. The downside risk of a bad purchasing choice for a large organization can be immense compared to the upside benefit of the best possible choice. That’s why they do what they do, and it’s ultimately the investors who are paying for that extra insurance.
Is there waste? Sure. But it’s a form of insurance, which is also waste if you never actually need it. The thing is, you don’t know (institutionally) whether you’re gong to need it, so it’s a bad idea to take the risk. Especially since none of the people actually working in the organization get to partake of the upside of a good decision, but will personally be penalized for the bad decision. These factors have zip-all to do with conspicuous consumption. Plenty of employees within a company will happily pay the hobbyist price, but are bound by policies that e.g. require support or SLAs for all software purchases, etc. Or else they have requirements like auditing or whatever it is that trips the “enterprise” flag.
IME, you have to get up to a somewhat higher level of management to have conspicuous consumption as part of turf wars or signaling personal importance, and you’re talking six/seven/eight figure deals there, not four or five. The closer you get to the trenches, the less people care about signaling to other managers vs. getting something to help get themselves through the day.