Opinion
Differential pricing, and learnings from a dental clinic
Summary
These days, even dental services could acquaint one with the practice of different customers being charged different prices for the same offering based on our ability and willingness to pay.The dental pain has been unbearable for months, and so a visit to a dentist was unavoidable. We started chatting about work, among other things. I went back after a couple of days to this well-established clinic and was informed that laser treatment was required. A price was quoted which appeared to be on a higher side. Later that day, on a call I informed them that I had changed my mind since that particular treatment wasn’t absolutely necessary. To my surprise, I was offered a discount. This was my first experience of explicit price discrimination in dental services. My lower willingness to pay had led to a reduction in the price. Would I have been asked to pay the higher price in the first place had I not revealed that I am a working professional?
The practice of price discrimination—charging different consumers differently for the same product or service—is well established in healthcare services. For example, Dr Devi Prasad Shetty of Narayana Health in his chairman’s address in its Annual report of 2019-20 wrote: “We also have an analytics programme to dynamically adjust the surgery package so that we try to match the patient’s ability to pay" (bit.ly/3xQXVdP). Doctors charging differential prices is not a modern phenomenon. It apparently existed in Ancient Greece too, when doctors would charge the rich more while the poor were charged much less in the name of a charity.
We often see price negotiations in street markets, where customers and sellers haggle over the price of vegetables/fruits, clothing items, etc, before arriving at a mutually agreed deal. Some customers try to hide their ability to pay by parking their vehicles at some distance and walking up to street vendors. We have long accepted differential pricing for local and foreign tourists visiting historical monuments. Students and senior citizens are routinely offered lower prices. Loyal customers and those who purchase in volume tend to receive price discounts.
Yet, there are situations when customer profiles are not known in advance and they can’t be segmented into groups depending on their willingness and ability to pay. In such cases, differential pricing occurs through limited-period sale offers, coupons, or purchase timing, as in the case of airline tickets. It occurs via buyers self-selecting their prices and thus revealing preferences.
Private firms often bundle products to offer different demand segments different deals. Our public sector also uses dynamic pricing, the Indian Railways being an example. It was recently announced that fares of the Mumbai-Ahmedabad Tejas Express, which may resume operation soon, would change dynamically.
Price discrimination, while helping sellers maximize profits, also tends to aid consumers because people who have a lower willingness and ability to pay are charged less. Without such pricing, the average single price for a product or service would be higher, thus adversely impacting relatively low-income consumers. A typical example is the case of education. Providing scholarships and financial assistance to deserving but hard-up students for higher education amounts to differential pricing.
Big data and payment technologies are making it easier for firms to charge personalized prices based on customer profiles. With digital QR code-based pricing gaining momentum with the covid pandemic, this can easily be done.
There is, however, a significant downside when online retailers try to engage in explicit price discrimination, unlike in the case of brick-and-mortar shops. There is no scope for consumers to haggle on an e-commerce platform. Differential pricing, therefore, comes across as non-transparent and unfair, even if it may be more efficient and accurate, thanks to database refinement. In such instances, customer goodwill could be lost.
Amazon’s experience two decades ago is a case in point. In 2000, it charged different buyers different prices for the same DVD and faced a huge backlash. Amazon had to apologize and provide refunds. In all probability, at least some consumers would have accepted price variations if they had a chance to negotiate face-to-face with the seller. After that experience, Amazon and online platforms largely engage in price discrimination via limited-period deals open to all customers.
Coming back to the dental clinic, it also used another technique famously used by Amazon to raise the switching cost of customers and raise brand loyalty—the equivalent of Amazon Prime, a platinum membership which includes among other benefits a 10% discount on every treatment, one free dental cleaning, and a home-delivered dental pack every quarter. By selling me this membership, it has locked me in for a year.
To sum up, the word ‘discrimination’ in the English language can either mean differential or unfair, depending on the context. Differential prices are not unfair in most cases; rather, the opposite. When, however, price setting occurs in a faceless environment with the use of technology alone and without human interaction, consumers neither trust technology nor the sellers’ intent. As they say, technology cannot replace the human touch, at least not entirely.
Vidya Mahambare is professor of economics at Great Lakes Institute of Management, Chennai
