Deep Discounting , Surge Pricing, Cashbacks and Freemium --- The Disruptive Pricing Models that are shaking up the markets
How do you price a product? Philip Kotler, in his book, Marketing Management, has given several models and strategies of pricing a product --- Cost-plus Pricing, Premium Pricing, Psychological Pricing, Penetrative Pricing, Market-skimming Pricing, Product bundle Pricing, Geographical Pricing and Value Pricing. But the new age companies like Apple, Google, Amazon and Uber have been regularly bringing in pricing models that are not only disruptive and innovative, but also having far reaching consequences on their respective sectors.
While Apple has regularly used premium pricing for newly launched models to skim the market and then gradually reduced the prices to hold on to market share, Google created a stir by giving away their flagship products --- Google Search, Google Chrome and the Android operating system --- for free. In lieu of that, Google preferred making money through Search Engine Optimization (SEO), Search Engine Marketing (SEM) and Digital Display Advertising. Since then, they have laughed all the way to the bank making $75 billion in annual sales with a market capitalization of $498 billion. Apple also follows closely with a market capitalization of $489 billion.
The other two companies --- Amazon and Uber --- have been creating a stir in the market with diagonally opposite pricing strategies. While Amazon pioneered the concept of deep discounting, Uber landed in trouble with lawmakers because of their surge pricing strategy. The deep discounting model, which has been religiously followed by e-commerce companies like Amazon, Flipkart, Snapdeal and Shopclues, actually offers products at rock bottom prices, often making a loss in the bargain.
According to a report in Business Today, Flipkart makes a loss of ₹5 per order. This loss is shown as promotional expenses which gets justified by using a figure called GMV (Gross Merchandise Value). Gross merchandise value is the total value of merchandise sold over a given period of time to customers. The higher the discount, the bigger will be the losses, but the GMV would be higher because more customers would buy more number of products at rock bottom prices. The higher GMV is then used as a metric to raise money from investors which is then used to give more discounts leading to more losses and a bigger GMV. A vicious cycle indeed !!!
The combined losses of Flipkart, Amazon and Snapdeal has crossed the ₹5000 Crore mark this year, with Flipkart making ₹2000 Crore loss, Amazon making ₹1724 Core loss and Snapdeal making ₹1328 Crore loss. Morgan Stanley, the main investor of Flipkart, has twice downgraded their investment by by 27% and 15% thus bringing down the valuation of Flipkart to below the $10 billion mark. Snapdeal is having a tough time raising fresh investments while there are talks in the market that they might be forced to go for a merger with Paytm. And with the Government bringing in laws to rein in predatory pricing, the era of deep discounting seems to be all but over.
On the other end of the spectrum we have companies like Uber and Ola who have been trying to bring in dynamic pricing by matching demand with supply. If the demand is less and the supply is more, the customers get deep discounts. But if the demand is more and the supply is less, they would have to pay a “surge price” to avail a taxi. This is not a new concept as the Airlines companies have been using dynamic pricing for a long time with a Delhi-Mumbai ticket being priced anywhere between ₹3,000 to ₹30,000 based on how many seats are left and the urgency of the buyers . Hotels charge higher prices during season and lower prices during off-season. Restaurants give hefty discounts during happy hours (3 PM to 7 PM) and put a hefty service charge during peak hours. Movie theaters charge higher ticket prices on Friday, Saturday and Sunday and lower price on weekdays.
But then Uber and Ola have been gaining bad publicity because of their strategy of surge pricing. Although they have been justifying this move by stating that surge pricing makes more taxis available as drivers see a scope of better earning, the government regulators and customers are neither amused nor convinced. This is because Ola and Uber, through their massive marketing campaigns, have created a perception that they offer cheap rides. Secondly, the surge pricing formula is incomprehensible to many of the commuters and hence perceived as a hidden agenda to fleece them. Thirdly, surge pricing is mostly imposed at the time when someone needs the taxi service the most; this leads to a great disappointment among the customers.
Among all this market disruption created by deep discounting and surge pricing, there is a company called Paytm who has been growing phenomenally because of their pricing strategy called “Cashback”. In the cashback mechanism, you do not get actual discounts, but the discount is stored in your e-wallet which can be redeemed during the next purchase.
Cashback ensures that the customer comes back to the site again and again to redeem their e-cash and hence ensures a steady base of customers with a higher degree of loyalty.
Another interesting model that has been used by Technology and Gaming companies is known as the “Freemium” Model. In this pricing strategy, you get to use certain basic features for free but have to pay a premium price if you wish to upgrade or use the high end features. LinkedIn, Google, Microsoft and Apple all have this kind of offers. Tata Sky offers channels for Re 1/- for the first month and then charges Rs 5/- per day. Kaspersky offers a free trial for a month and then charges money to buy the software. There are several games in the Apple and Android stores which you can download and play for free but have to pay a premium price to go to the next stage and play the higher versions.
Economics states that the equilibrium price is the point where the demand curve intersects the supply curve. Any price above the equilibrium point brings higher amount of profit to the seller and pain to the buyer whereas a vice-versa situation will cause loss to the seller and delight for the buyer. The disruptive models like Deep Discounting, Surge Pricing, Cashbacks and Freemium are now bringing in more dynamic mechanisms to what was known as value based pricing or fair deals in earlier times.
(The author is a Professor of Business Analytics and Digital Marketing. The views expressed here are his own and not that of any organization).