Co-Opetition - Adam M. Brandenburger [113]
Most of the time, complex pricing schemes serve to mask high prices. Sometimes, though, sellers make things complicated in order to hide how little they’re charging rather than how much. They’re willing to sell their product at a bargain price, but they hide the low price to avoid creating a perception of low quality.
When it first came out, Microsoft’s Powerpoint presentation software was a distant second to Harvard Graphics. Even after Microsoft improved its product to the point where it outperformed the competition, people were slow to switch over. To build sales, Microsoft could have tried cutting the price of Powerpoint, but people might not have believed that a discounted program was better than the $290 Harvard Graphics. So Microsoft kept the list price of Powerpoint high, at $339, but also included the program along with the much more popular Word and Excel in its Office software suite. Thinking that they were getting a $339 program as a bonus, people were eager to try it. Today Powerpoint is the clear leader in presentation software.
Complex pricing schemes make it hard for buyers to comparison shop. That’s a problem not only for buyers but also for entrants trying to break into the market. If buyers can’t quite figure out how all the prices add up, how can they decide whether it makes sense to switch? They can’t, so, for the most part, they don’t.
Making the Right Call What do you pay for a minute of long-distance calls? Not sure? We thought so. Most people find it impossible to keep track of all the different rates they’re charged. There are the rates for daytime calls, evening calls, in-state long-distance calls, out-of-state long-distance calls, international calls, operator-assisted calls, and more. It’s a big fog.
In Japan, there’s another layer of complexity. The phone companies there even charge for local calls. This pricing fog is a problem for DDI (Dai Ni Den Den Inc., or “2nd Telegraph and Telephone”) as it tries to gain market share against the dominant carrier, NTT (Nippon Telegraph and Telephone). For some calls, DDI is cheaper; for others, NTT is cheaper. But which carrier is cheaper overall? That all depends on your calling pattern, and that’s hard to predict. There isn’t a compelling case to switch to DDI. If you know that a particular call would be cheaper on DDI, you can route the call that way by using a four-digit prefix, but that’s a bother.
DDI has found a way to solve this problem. In partnership with Kyocera, a major shareholder, DDI has developed a chip that goes inside the phone. The chip stores the prices that DDI and NTT are charging and automatically routes each phone call via the lower-cost provider.23 Whenever there’s a price change, DDI simply sends the new information over the lines to the chip inside the phone. Now consumers don’t have to worry about the fog at all—the chip does the comparison shopping for them. And DDI is sure to get their business whenever it has the better price.
The “chip phones” are the essential complement to DDI’s business. And just as the chip phones increase the value delivered by DDI’s service, DDI’s low rates make these phones more valuable. This is why electronics manufacturers such as Matsushita and Sanyo are happy to build the chip phones. They can make a selling point of the fact that these phones more than pay for themselves with the money they save on phone bills. So Matsushita and Sanyo help DDI get the chip phones inside people’s homes.
Complex pricing schemes have a number of costs. Customers can get confused and frustrated trying to peer through the fog, and that damages their perception of the product. In the case of airline pricing, the development of yield management systems in the 1980s led to a huge number of different fares in the marketplace. By the early 1990s the complexity was out of control: American Airlines alone had nearly half a million