Hot Product Pricing

Let’s say you are a technology company getting ready to introduce a heavily hyped new consumer product that has generated a lot of buzz. You know that customers vary in their willingness to pay for your new item, and you would like to charge the high-value customers a high price and the lower-value customers a lower price. What do you do?

One strategy is to release the product with a really high initial price, perhaps accompanied by a restriction in supply to make sure those high-value customers fear that if they wait they might miss out. Once you’ve captured the high-value customers, go ahead and cut the price.

This is a simple case of indirect price discrimination. When sellers can’t tell the difference between high- and low-value customers, they must design some way to get the customers to identify themselves. Sellers often accomplish this by designing different versions of the product (like home vs. business versions of software). In the case we are discussing here, the “versions” of the product differ on the time dimension. Version A comes with the “feature” of being available now. Version B is the exact same except it’s not available until some time in the future. High-value customers identify themselves by shelling out the bucks for Version A, and low-value customers wait for Version B.

Does this sound like anything we’ve seen recently in the technology world? How about Apple’s pricing path for the new iPhone? The company recently cut the price of its 8GB iPhone to $399 ($200 less than its release price).

This example also shows the risks of price discrimination schemes as noted in an earlier post. Remember, no one wants to be the schmuck who paid $200 “too much” for the phone. Apple has tried to control the damage by offering $100 rebates (in the form of store credits) to early adopters.