Redeye VC

Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

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Some thoughts on pricing...

Istock_000004205752xsmall I recently returned from a family vacation, and while I tried not to do much "work", I did find that a hotel can provide an interesting ecosystem to observe some interesting pricing dynamics. 



Pick a Price, Any Price

Despite my best efforts to kick the habit, I still find myself addicted to Diet Coke.  And while I was able to lower my intake on vacation, I still found myself craving a Diet Coke or two during the day.   What surprised me was the multitude of different places -- and different prices -- a single hotel sold the same product for.  The mini-bar in the room sold a can of diet coke for $3.50 (ouch!).  The soda machine down the hall sold it for $1.00.  The gift shop sold it for $2.00.  You can order it in one of their restaurants for $2.50 a glass (with free refills) or you can get it delivered poolside for $2.50 (with no refills).   And you can order it via room-service for $2.50 plus a $2 delivery fee.  Five different prices (ranging from $1 to $4.50) for the same product.  The only difference is the method of delivery -- and the convenience each method offers the consumer. 

And this got me thinking- can this model work online?  Are there examples of online services which charge differentially for the exact same product?  Let me know what you think...


The Anti-Penny Gap
I've written before on "The Penny Gap" -- where I discussed the challenge in converting a user from free to paying.   In that post I concluded that the hardest part of an online business was "getting your users to pay you anything at all".  Well, after this vacation I have to add an amendment to my theory. 

My wife and I wanted to go out to dinner without the kids a few times on the trip, so we asked the concierge if they could recommend any baby sitters.  The provided me with a list of three services - Capable Caregivers, Affordable Assistance, and Reliable Babysitting Agency.  There was no description of the services.  No references.  No recommendations.  No listing of "years in business".  Just their names, prices and contact information. 

So how am I to choose which one to select?  Do I trust my kids lives with "Affordable Assistance" for $12.50 an hour?  Or do I select the more expensive "Capable Caregivers?"  Well, in the absence of any comparative information, I chose the Capable Caregivers.  (As did, it appears, everyone else in the hotel -- my informal study of six other families who hired babysitters from the hotel concluded that everyone chose the most expensive option).

So I hereby amend the Penny Gap theory -- when a decision involves (1) safety/security/risk, (2) children, and/or (3) information assymetry, the highest price is often chosen over all over options.  Let me know any other places where the "Anti-Penny Gap" applies.

Comments

Steven

The differnce in pricing depending on delivery method already applies, content delivered by mobile is more expensive than content delivered by internet.

The anti-penny gap also applies when buying wine if you are unfamiliar with the wines you tend to go for the more expensive(within reason) particularly if you are looking to impress

S

Steven

The differnce in pricing depending on delivery method already applies, content delivered by mobile is more expensive than content delivered by internet.

The anti-penny gap also applies when buying wine if you are unfamiliar with the wines you tend to go for the more expensive(within reason) particularly if you are looking to impress

S

jeremyliew

Slightly different example of people assuming that price and value are correlated is in digital gifting. Since there is no intrinsic value to one digital flower over another, the price becomes the signally device that demonstrates how valuable the gift is.

Take a look at the wikipedia article on signalling theory for more on this topic, where "cost" is more broadly defined beyond money (e.g. why do deer grow such huge antlers ; why do people go to business school?)

http://en.wikipedia.org/wiki/Signalling_theory

David Armstrong

I've always thought the "free-mium" model was broken...the barrier to entry is too low...your competition just does what you do for free but with ads. So those who value their attention will pay for no ads if the price point is good...almost brainless, e.g. $4.95 a month. I think Mozy is a good example of this. We are emulating similar thinking in a few areas.

David

The Anti-Penny gap also applies in some instances to health care. Seven years ago, when I was choosing a surgeon to perform LASIK on my eyes (and when LASIK was not as much of a commodity as it is today), I used the highest priced = best equation in the absence of other meaningful differentiators.

DBM

Wine by the glass!!
When at a bar wanting just a glass or two of wine - if they are all unknown to me I just choose the most expensive one. I assume it is the best.

Dharmesh Shah

Absent any information about a product/service, my guess is that customers use price as a signal of quality (as there is nothing else to base it on). For babysitting, quality is important, so people pick the higher priced option.

As for price differences based on delivery mechanism, this is really a manifestation of price discrimination (from an economic perspective). The idea is to find the efficient curve. It's a little weird in the hotel example, because in most price discrimination models, the customer would not be exposed to multiple prices at the same time.

Pam Tournier

Anti-Penny Gap applies anywhere the consumer is personally invested in the consumption experience -- i.e., status or self-image purchases (kids being an extension of self image). Low-involvement purchases entail the Penny Gap theory. The catch is, what's status to me may not be to you -- different people invest differently. We see this dynamic clearly in statistical analysis of credit and debit card paper trails -- we can predict price-sensitivity by looking at what different people connect with emotionally.

Rajeev Kulkarni

Experience indicates that whenever there is safety, ignorance about an expensive product category or gift giving involved, this pricing theory applies.

For example:
Safety: Your example

Product Category: Ask my wife to buy a HDTV. She will follow the same pricing-value theory

Gift Giving: Wine, toys, etc.

The interesting point is that this theory works from the customer's point-of-view while the actual product/service supplier might be totally ignorant about this fact.

As a product/service supplier one can successfully apply this theory if they can manage their channels well.

Rajeev

TedC

WebThere service will answer your babysitter question, provide the info free of charge, and give you points and reputation value in the process. Why convert the user to paying for the service? The business should support. The conduit shouldn't charge the consumer.

Frank San Miguel

I am helping to start up a not-for-profit child care center. 25% of the kids will be drawn from low income families, the rest will pay much higher rates.

Those 25% would never be customers without a scholarship, regardless of how good our service is.

I think your comment "...highest price is often chosen over all other options..." depends on the target customer base.

Thanks for posting. I've shared your comments with the rest of the board.

Frank San Miguel

A new PA regulation bans labels on milk and dairy products that say it comes from cows that haven’t been treated with artificial bovine growth hormone (http://www.nytimes.com/2007/11/11/business/11feed.htm):

A dairy farmer opposed to the rule says:
“...We just feel that consumers, when given the choice, for the same price point, will always choose a product that they believe is the most naturally produced available...”

Joe Mohan

Lest we forget airlines invented segmented pricing and sell a fair amount of product online. While you were flying to your vacation you probably had 10 different prices on seats to the 10 people closest to you.

Matthew Maroon

Maybe I misunderstood the penny gap. I thought it meant that the hardest cent to earn was the first. In the case of the babysitter, all of them had to overcome the penny gap by getting you to sign one up at all. The only way the penny gap was relevant was if you would not have given your children to the cheapest one in the absence of any of the others. In that case charging more did get you spend the first penny and is an exception to your theory.

But really, there are tons of areas in life where people will often choose to spend more. Everyone has said "you get what you pay for" 100 times in their lives.

Don Jones

I run a venture capital database. The price we charge for self service access is always the same. But the price we charge for custom database services has an element of "rush charge" to it. If you want the information very soon, you pay more. Same information, just a rush job. So, pricing can vary by how soon the person needs the service or product.

Regarding the Penny Gap (perhaps your original post), in our case, we show the user how much information they would be getting if they paid for it - we also communicate it to them in a way that tells them they are "losing" something by not subscribing. So we reframe their decision to not subscribe as a "loss" to them.

Cameron Schaefer

I completely agree with your observation of children as a category where the anti-penny gap applies. My wife and I are actually having our first baby tomorrow (hence me being wide awake at midnight in a state of pure terror) and throughout the process of getting ready for a child we have noticed how much unspoken pressure there is to buy "the best" for your little one.

We tried to unmask the areas where cost wasn't directly related to safety, but it is indeed very hard to escape this sick parental rat race.

chad doane

I offer my potential customers a free PDF of doane paper to "test drive" from doanepaper.com and I also offer the same sheet of paper in a traditional legal pad with 50 sheets. I often wonder if the free PDF is cannibalizing the sales of DP legal pads or is the "test drive" pdf actually generating sales for the legal pads?

Kelly Choo

Hi Josh,

Maybe this will help you cure your addiction to Diet Coke.

http://www.youtube.com/watch?v=aQp0kA5a5OI

http://www.youtube.com/watch?v=LNUeZzx7JaE


- Kelly

Sean Glass

Josh - Just shared this with my wife who's thinking of starting a pet sitting business in Hampstead - pet sitting is a good fit with babysitting.

Great observations - I think you're also running into what economists would talk about as "snob effect" - i.e. part of the inherent value of the product is that someone can feel good that they paid a lot for it, or by others knowing they paid a lot they gain stature - think of Coach handbags as being one good example. As others have pointed out, we use price as info on quality when other info is lacking. With a luxury good, price is not just information about quality, but may add value to the product in that when everyone knows what you use is expensive, it might demonstrate that you only use high quality products and thus burnish your brand (if that's what you want)... I don't think snob effect is the best name, bu t that's what it's reffered to as :-) speak to you soon

شات


http://www.a1z3.com/vb

Christopher Mengel

home health care for seniors with alzheimer's.

توبيكات ملونه

WebThere service will answer your babysitter question, provide the info free of charge, and give you points and reputation value in the process. Why convert the user to paying for the service? The business should support. The conduit shouldn't charge the consumer.

rüya tabirleri

I offer my potential customers a free PDF of doane paper to "test drive" from doanepaper.com and I also offer the same sheet of paper in a traditional legal pad with 50 sheets. I often wonder if the free PDF is cannibalizing the sales of DP legal pads or is the "test drive" pdf actually generating sales for the legal pads?

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