CHAPTER 17 Sophisticated Pricing Strategies
How far can it go? Depends on the software.
As Hurricane Irma passed through the Caribbean it generated winds as high as 185 miles per hour, causing catastrophic damage wherever it made landfall. It destroyed much of the Virgin Islands, killing several people along the way. It then turned northwest, setting its sights on Florida. The governor declared a state of emergency and ordered thousands of people to evacuate.
That’s when one technology-lover—the owner of a Tesla electric car—discovered a problem. Their car—a Tesla Model S60—could hold enough charge to drive 200 miles, but it would take a trip of 230 miles to escape the evacuation zone. A quick phone call to Tesla asking for help yielded a surprising result. Quietly, Tesla sent a fragment of computer code to potentially stranded car owners, temporarily unlocking the car’s latent ability to drive further.
You see, Tesla sold two versions of their Model S. The Model S75 came with a 75 kWh battery which gave it a range of 250 miles. The Model S60 was $6,500 cheaper, and as you might expect if it had a 60 kWh battery, it had a shorter range of 200 miles. But in reality, it had the same 75 kWh battery as its more expensive sibling. The only real difference was that Tesla had added a snippet of code to the cheaper car, and it was that line of code—not any physical battery limitations—that gave it the shorter range.
Why would Tesla purposely cripple some of its cars? The answer is that it’s part of a sophisticated pricing strategy. Tesla figured out a way to get different customers to pay different prices for the same good. Price-sensitive customers could pay $68,000 for the S60—as long as they’re willing to live with the shorter range. And less price-sensitive customers could pay $74,500 for the S75 and avoid the hassle of charging the car more often.
It’s a surprising answer to a question that many managers ask: How can I make as much money as I can from each of my customers? Tesla’s answer is to charge some customers more than others. As we’re about to discover, there are many sophisticated pricing strategies you can use to do this. Get this pricing strategy right, and you’ll drive your profits up.