Online pricing: should the rich pay more?

Do people who make more pay more for goods and services? Of course they do. In some situations, this works and is the only way for companies to sustain themselves. Online companies usually do not have this excuse. Rarely do online companies have overhead that need to be increased based on income and rarely does the company owner have the knowledge of how much the consumer makes to accurately determine if their audience receives higher incomes. Scaling prices based on income can backfire if not handled properly.

I read an article this morning asking whether it was fair for rich people to pay more? Reading the article, I thought it was rather foolish because this already happens. Go to a store in the ghetto and price some products. Then go to a store in a middle class suburb and price the same products. Then go to a store in a upper class suburb and price the same products. You’ll notice the prices increase. The same thing happens with houses. In many cases the newer homes, that are not built as well, are more expensive than older home based on their location. Salaries are sometimes paid per location due to the economy of the area the company is located. Scaled pricing is nothing new. It ends up being a percentage of income. The more you make, the more you pay.

This method works because each city is independent of each other. The city itself has different price variables, for example taxes. The cost of doing business in the upper scale cities will be higher; therefore, the prices will be higher to make up the difference. If you think about it, not only are taxes, products and services higher so are salaries. Each city has its own economy.

Online activities do not have distinct locations like cities unless they are closed communities. For example, if a community had an income requirement and, based on that income requirement, set their prices. What I often see are business owners giving people two different prices based on their perceived income for the same product or service. In most cases, the company owner does not have higher overhead to justify the higher prices.

You realize how and why that can fail miserably, right?

Share and share alike

This is The Share Era. People go online and share their experiences about everything…even things it might be wiser to keep private. If an online business owner is offering a product or service it would be wise to keep in mind that people talk, and scaling up (depending on the product or service) might hinder the ability for growth. People can share negative experiences just as easily as sharing positive experiences. Ironically, people tend to share the things they do not like before sharing the things that please them.

Pricing by income for an online product or service would mean making many assumptions on the business owner’s part. Even if the business owner was accurate, is it a wise thing to do? For example, I am often quoted a higher price for things because the assumption is that I am rich (I’m not). Most times, I recognize the higher price and rarely, do I feel the extra price is worth it. I’m not getting a better product, I’m getting the same product for a higher price. I could see if they played the celebrity method…charge higher and give better service. I’m paying three times more, put me at the front of the list (if only to get the money faster). Give me a better warranty. Give me a reason to pay more. In the celebrity world, they pay more for better service attached to the same products and services. Greedy business owners do not think that way. They think client with money = their potential to make more without giving more.

Let’s say I take the higher price, I’m pleased with the work, and I recommend the company to my online friends. My friends will ask me how much I paid and what service(s) came with the product or service. I tell them the price I paid – the higher price. What if I make more than my friends (especially since most online “friends” are strangers)? My friends will not use the company because their prices are too expensive. If the company approaches my friends with cheaper prices, that opens the door to alienate their high paying client. If I find out about it, and I most likely will, that’s a wonderful blog entry, isn’t it? How I was charged more because of the assumption I make more. Without extras to fall back on, my point would be easily proven. The door is also open for competing companies to approach my friends, and myself, with lower prices and more service.

Think this does not happen? Wrong. It happens daily. Every day on Twitter I see people sharing their experience, it gets re-tweeted away outside their friend circle, and someone comes up saying something like, “Wow, I only paid $500. Sucks to be them!” and eventually someone clues in the original poster about the price difference. Or, after sharing their experience, someone will say, “You can get a better deal going with XYZ” which is another “friend” sharing their positive experience. Of course, once the knowledge is out the company owner charges based on biases, who is going to want to accept the higher (artificially inflated) price?

What to do?

Depending on the product or service, I recommend pricing by the hour or service. Make sure all the variables are included in the hourly/service price. If a product takes a similar amount of time, the price will be similar and not dependent on the income of the purchaser. This way, if I recommend the company, my friends with lesser incomes (or higher incomes) can get a similar deal with a similar level of service. The sharing level is equal and has more potential for growth. Also, it makes it easier for consumers to scale up or down the price. Maybe they do not need as much or need much more. The negotiation doors are open without affecting previous or future customers.

Basing business decisions on greed will usually lead you down the wrong path.