Ever wander into some fancy deli and try to make sense of a wall of exotic snacks? Luxurious corn crisps dusted with rare cheeses, caviar, or truffles from Dumbledore. Indulgences you only thought existed on Gwyneth Paltrow’s fleet of organic yachts. The only thing each package has in common is a conspicuous lack of pricing. That bag of truffle puffs might cost a manageable $5. Or maybe, the store manager noticed your shiny new iPhone and fake Gucci bag (which he presumes is real). He’ll invent a price you’ll never afford. You’ll end up his joyless concubine, toiling for decades to repay that tiny taste of truffle. So you slink past the fancy stuff and pick up a safe, pre-priced bag of Doritos. $3.99. No fuss. No serfdom. In this scenario almost everyone loses. You didn’t get to taste (or Instagram) an exotic snack. The exotic snack company lost a new customer. And the store owner lost a high margin sale – and a reluctant companion. Only Doritos won. Why? They gave you price certainty. In my experience with startups and corporations, revealing the price is almost always better than hiding it.
Thousands of businesses – from packaged goods to retail to tech – are losing millions in sales by playing games with hidden pricing. And, they’re inflicting a mild form of psychological torture on customers, sowing the seeds of discontent. Like any bad relationship, those customers will gladly snog the first decent alternative that comes along. Below, I discuss three types of price uncertainty and lessons from companies I believe are actively irritating and repelling customers, begging competitors to step in.
The Certainty Deficit
By any historical measure, we are supermen. Today’s humble smartphone user would be a billionaire in 1981 or a god in 550 B.C. But as I wrote in The Economics of Happiness, all that technology doesn’t feel empowering. First world abundance brings its own set of problems. From Wall Street to Wal-Mart, we’re drowning in a sea of products, features, and meaningless micro-decisions. But our luxury of choice is more like the anxiety of choice. At its root is a growing insecurity with massive technological change. From now on, companies that provide a counterbalance to uncertainty will win. That means eliminating friction, providing superior customer service, and simple transparent pricing.
What is Price Certainty?
I define price certainty as the transparent, simple disclosure of price, fees, and terms. Though many variables affect pricing decisions, a much smaller subset affects price certainty. The main ones are:
- Complexity of the product or service
- Context – where, when, and to whom the price is presented
- Expense – while price is the output of pricing strategy, it’s an input to price certainty.
Three Types of Price Uncertainty
1. Variable Pricing
As an economist and innovator (“Econovator…”), I’ve been enamored with dynamic pricing. Businesses can maximize profit by adjusting price based on demand, timing, or other conditions. We have the technology to do it in any category. It seems like a great idea, except it’s like taking a tinkle on your customers. Here’s why:
Airlines are the oracles of dynamic pricing. Saddam Hussein had better approval ratings than most airlines. As an industry, it’s ranked 47th in customer satisfaction – just above fur skinning and dwarf-tossing. Sure, increasing fees, gulag-style accommodations, and Soviet-era friendliness don’t help. But price complexity is a huge part of it. How can customers budget for a price that swings by 30-80% while planning a trip? The insult to injury is that the service itself will be identical. People on a plane will end up sitting next to others who paid double or half of what they did. Resentment is at record levels, but huge barriers to entry keep this practice alive. I do think there is opportunity for hungry, smaller airlines to step in and offer price certainty.
Auction sites (like eBay and Priceline) are in decline. More accurately, the auction part of their businesses has stalled. There’s a finite population who like playing games when buying goods or guessing where their hotel will be. Sure, there’s that Gambler’s High of winning a bid for a vintage Atari 2600. But for most people, auctions complicate and elongate the buying process. They delay what the customer really wants – the pleasure of owning and using a highly pixelated gaming system from the 1980’s.
Uber is a car service phenomenon that gave Silicon Valley a $258M orgasm. The company uses “surge pricing” to raise fares during periods of peak demand – weekends, holidays, and other times you’d really need a ride. This unpredictability has upset people. As with airlines, surge pricing is economically sound, but people will harbor resentment if they felt exploited in a time of need. Uber can avoid opening the door to friendlier competitors by creating simple price tiers and assuming some of the price risk.
2. Multiple Purchase Points
Multiple purchase points spawn when companies try to “bundle” related experiences but produce a disjointed mess instead. One company has elevated this frustration to an art form.Lenscrafters is a chain of glasses stores owned by the Luxottica monopoly, which makes almost every designer brand of glasses and controls distribution through chains like Lenscrafters and Pearle Vision. Glasses are a particularly aggravating purchase. They’re unnecessarily expensive, highly personal, and require multiple steps. Instead of charging $250 for a complete package (exam, designer frames, and thin lenses), Lenscrafters tortures customers with an endless stream of micro-decisions.
- How much is the frame? “$359”
- How much is an exam? “You’ll have to negotiate that separately with our affiliated optometrist, who mysteriously works in the back of our store, but never tells us his prices.”
- How much for the thinner lens? “How much thinner do you want them?”
- Does this come with anti-glare? “Have you seen our coatings packages?”
It’s easier to buy a pet Orca than to walk out of Lenscrafters without Posttraumatic Stress Disorder. This death by 1000 price points is why competitors like Warby Parker are so appealing. Like Amazon did with shipping, Warby shows they could shield customers from the ugly, unnecessary complexity of multiple pricing decisions. But this industry remains inefficient and profitable with plenty of room for new competition.
3. The Backend Surprise
Some companies are only semi-transparent. They show one price, then surprise you with fees you’d need CSI to unravel. Some examples:
Ticketmaster has been accused of being a monopoly or worse, a Belieber. During checkout, the company tacks on service fees of up to 25% of the ticket price. Then on the final screen, it slaps on a few dollars more for handling, whatever that means. Since Ticketmaster has exclusive contracts with most venues, pleasing consumers isn’t much of a priority. StubHub, a competitor owned by eBay, recognized this frustration and announced all-in-one pricing.
Mobile carriers and cable companies are notorious for sketchy add-ons that can turn a $70 phone plan into $100 with taxes and “recovery fees” (that no doubt go to build playgrounds and rescue puppies). Prepaid providers like Ting and MetroPCS have built successful alternatives almost entirely around clear, transparent pricing.
Restaurants are notorious for not telling customers the price of specials. They also place that mysterious “MP” next to seafood items. What if you forgot to visit the local fishing village that morning? Or, you’re not a clam commodities trader? You’re screwed. So “market price” becomes whatever the restaurant thinks it can get away with. Ironically, the only thing it’s getting away with is lost sales. Unless someone else is paying, most customers shy away from the unknown. They end up ordering chicken. Everybody loses. (PS – Lobster, the most notorious “MP” offender, costs less than chicken. Take that, expensive dates!)
Shipping costs in the pre-Amazon era were a disaster. Prices meant nothing until the final confirmation screen where crazy shipping costs turned $5 cables into $12 purchases. Many companies advertised items at a loss and buried profits inside shipping fees. Amazon took advantage by hiding the complexity and expense of shipping from consumers. Order
$25 $35 and you never think about shipping costs again. No other company has been as successful or focused on eliminating consumer friction.
To Hide or Not to Hide?
There are many ways to find out if transparency is right for you. The short answer is: yes it is, in most cases. In fact an category of subscription startups spawned almost entirely around certainty – of price and supply.
As with any rule, there are exceptions including certain customized services, B2B, and captive environments (where customers are
your prisoners enveloped in your experience).