Monday, 30 November 2009

Cross-pricing problems

The old saw has it that Gilette started the "give 'em the razor, but make 'em pay for the blades" pricing strategy. It's an effective price discrimination strategy: low value customers will keep using the old blades for a long time, high value customers get to identify themselves by refreshing their blades more quickly.

Same thing happens in computer game consoles. The Sony Playstation 3 is very cheap; Sony recoups it in the games. High intensity gamers pay more by buying lots of games and subscriptions; low intensity gamers just buy a couple. If the console were sold at a single price, the lower tier gamers would drop out of the market.

The pricing strategy only really works, though, if somebody else doesn't have a strong demand for the product that doesn't require buying the blades, or the games. We find now that the American military is buying thousands of PS3s to build into clusters that operate as supercomputers. Now, we'd expect that if it were a commercial outfit doing this, Sony would simply refuse to fulfill the order. Supermarkets list "not for trade" on their loss-leaders and have maximum purchase quantities. But is the DoD a buyer they can't refuse? Or is the publicity of having their platform being one of the DoD's supercomputers worth the losses on the units? I wonder what Sony thinks of this.

HT: BoingBoing


  1. Hmm. I thought the razor/razor blade was all about lock-in rather than price discrimination.

    If you had everyone buy, at the start of the year, a razor and full year's supply of razor blades, they'd look at the total cost of ownership.

    But if you sell them a cheap razor with a small number of blades, they completely ignore the monthly cost of another box of blades. Hence, you create lock-in with your customers and long-term profits by under-pricing the razor.

    I'm sure there's some price discrimination in there too, but I didn't think that was the main part of the ploy.

    On the PS3, I'd expect the US government isn't paying retail for them anyway, so probably Sony is selling at close to cost price. Having said that, 2,200 consoles is a drop in the ocean anyway....

  2. @PaulL: Doesn't lock-in of that sort require either irrational or heavily-discounting customers? I get nervous about stories like that.

    It's certainly possible that the DoD is buying them at a "for trade" price that exceeds retail, which would solve the problem.