New venture outsourcing blog

On my recent holiday trip, I noticed a strange thing- the tariff paid by hotel customers was based not on how they booked and which plan they booked under but by which country they belonged to. While I paid a lower tariff in Indian Rupee, most of the other guests, mostly non-Indians, had to shell out as much as 50% more for the same room. The logic goes like this- any foreigner, who is visiting India and wants to stay at a good hotel, must be reasonably well off. Moreover, they must be willing to pay what they will pay for a good hotel in any part of the world. While it sounds like a rip off, most hotels in India are overflowing with foreign travelers paying a higher tariff. It’s a classic case of what economists call price discrimination. 

Many pharmaceutical and publishing companies follow the same rule when they price their drugs or books differently in different countries. For example, a paper back version of most academic books in India costs significantly less than the same version in US. Since the company is able to recover most of the fixed costs from the higher priced markets, they are able to sell profitably even at the reduced process in other markets. This allows them to capture a share of the market that would, otherwise, would have been lost. 

What keeps it going is the inability of the product or service to leak back – buyers of cheaper versions not being able to resell into the higher priced market. Does your product or service lend itself to such discrimination? Are you currently able to maximize your revenue and profits through price discrimination? I can almost see 95% of the readers shaking their heads- it does not apply to me. I can’t do it. 

Think harder- think of new markets that you have not even thought of serving. If you are currently profitable and your variable costs are low enough, I am sure you can find another market. In the next post, we will see real world example of such opportunities. 

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