The Price of Everything

From the NYT, Diner Beware: Turisti Pay More in Roman Restaurants

It might be an extra 30 cents for an espresso, or a $5 tithe tacked onto a bottle of wine. It may even mean the substitution of lower grade ingredients. But the practice of charging tourists more does exist and is committed daily, even hourly. If executed properly, the turista will be none the wiser.

“You think you are being taken care of,” said Christian Boyle, a Londoner who has spent some months in Rome. Soon after arriving, she and some friends displayed fatal naïveté, when they were not sure what to order at a restaurant just off the Piazza del Popolo. “We couldn’t decide,’’ she said, “so the waiter said he would bring us some things to try.’’

“One thing kept arriving after another,” she said. Things were fine until “he charged us full price for all these little dishes that we thought we were just trying.”

People hate getting cheated.  Evolutionary psychologist Leda Cosmides built pretty cool experiments to demonstrate how good we are at finding cheaters.  Turns out, the human brain specifically evolved the ability to detect cheaters.

Which brings us to price gouging.

Not talking about supply and demand or “Why does gasoline cost more when a hurricane is blowing in and everyone is filling up?”.

And gouging is certainly different from legitimate price discrimination (Profitdesk’s bread-and-butter). 

Go ahead.  Find ways to charge according to price sensitivity.  Just offer the same choices to everyone.  Or set up prices according to logical criteria. 

After all, no one gets worked up over the senior citizen discount at the movie theater.

The tricky part is when you enter the grey zone.  When people sense a game, they feel like they are being played.  Who wants to find out the guy in the airplane seat next to you paid hundreds less for the exact same thing?  Or this Wal-Mart has different prices than the one across town?

Customers can fight back and will devote effort to it.

So where does that leave price optimization technology?  It is still the biggest unturned stone in most companies.  There’s a lot of gold there.  But don’t get cute with it - always look through your customers’ eyes to make sure they won’t feel cheated.

Bankers: if you sit on a deposit pricing committee, think carefully about your policies in four areas:

1. Rate exceptions - different rates for people that complain.  This incents the sweet, little grandma to storm into your branch, snarling and armed with Sunday’s print ads.
2. Pricing regions - different rates for people that live in certain areas.  Will your customer stop by the branch by work and demand to know why there’s a different rate board?
3. “New” money - different rates for money that has been with a competitor.  Sure, they’ll jump through a hoop.  The customer will write a check on balances with a competitor.  And then write another one back to the competitor.
4. Off-term rate specials - different rates for odd term CDs.  A good chunk of your 13 month CD customers will call around for a different rate special in 13 months.  They’ve been taught that odd terms mean “don’t renew”.

And heaven help you when the front line gets involved.  You’ve trained them to help the customer.  Then, you rewarded them based on their deposit numbers.  Of course, your branches will sherpa the customer through the process.

Your specific policies may make sense, but beware of perceptions.  If you can figure out how to beat the pricing game, your customers will too.  

However, we’re not merely talking foregone profit.  This game affects the bank’s most valuable asset - trust.  Tread carefully.

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